After a year of strong retail sales, consumers are starting to feel the impact of inflation and real income as it materializes across the economy.
Retail sales dropped 1.9% at the end of 2021 as rising costs weakened holiday spending. Although some experts argue that holiday sales began earlier this year to avoid supply chain snarls and shipping delays, the omicron variant prompted some folks to shop online.
The slump in sales not only manifested in retail stores but also non-store retail, which plummeted 8.7% month-over-month after a slower 1.5% decline in November.
It’s the latest indicator that spending is finally starting to catch up with consumers, and now Americans are deeper in debt.
Despite more than three-quarters of Americans receiving some form of pandemic relief, more than one-third said their household financial situation has gotten worse over the past year.
According to a recent study from NerdWallet, Inc. the average U.S. household with debt owes $155,622, with American households holding $15.23 trillion in debt nationwide. That figure is up 6.2% from a year ago.
Part of the shift in sentiment surrounding financial situations can be attributed to price hikes, which are starting to become more tangible, according to James Knighley, chief international economist at ING.
"The dollar in your pocket isn’t going as far, and highly visible prices where you conduct regular transactions, such as food and gasoline, are surging," Knightley told FOX Business. "This is making people angry and cautious at the same time."
It’s not just higher expenses to blame. More than one-third of Americans say their financial situation has worsened because of the decline in household income.
"Consumers are definitely struggling to make ends meet," Sara Rathner, credit card and travel expert at NerdWallet, told FOX Business.
With the median household income falling 3%, while the overall cost of living is up 7%, according to the latest CPI report, "it's harder to afford everything you need every day, not just groceries and gas, but bigger things like housing and medical expenses," Rathner said.
Even though wages are up as a result of price pressures and labor shortages, price growth continues to outpace the cost of living, with red-hot inflation eating into paychecks. Average hourly earnings for all employees decreased 2.4% in December from a year ago, when factoring in the impact of rising consumer prices.
"Consumers have benefited from a tremendous amount of stimulus injected into the system through fiscal and monetary policy," Mark Hamrick, senior economic analyst at Bankrate.com, told FOX Business. "The savings rate has returned to more typical levels in recent months, but the highest inflation in decades has meant that real wages have turned negative which weighs on the consumer mindset."
And with interest hikes looming, loans are also set to become more costly.
To cope with the growing cost of living, more Americans are cutting back on necessities and even leaning on emergency savings.
"We've really learned the importance of having a source of emergency savings, having cash on hand for those necessities and those unexpected expenses," Rathner said.
Despite the current economic environment where wages can’t keep up with inflation, Hamrick says this could turn to a more positive dynamic in the second half of the year.
A study from Bankrate.com finds that price pressures could reach their peak this year.
"At the same time, many in the workforce have been and will be inclined to try to forge ahead by seeking employment that pays more and provides for better working conditions, including more flexible hours and opportunities to work remote, when appropriate or possible," Hamrick said.