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Consumers are bifurcated – some pulling back, while others spend more. Why?

With record high inflation, lower income households are now cutting back or trading down, while higher income continue to buy almost like normal — in fact they are spending on discretionary travel and luxury items as they cater to their (pandemic) pent-up demand.

The amount of SAVINGS each group has is what's primarily driving the divergence in behavior.

During the Pandemic lockdown, people were able to save more, as they couldn’t spend on things like travel, restaurants, etc.. Additionally, the government provided high levels of stimulus money, most of which was saved too.

The net result is an almost 2X (doubling) of cash savings for all income groups vs pre-pandemic times.

However, while it may have doubled, the “absolute” $ amount of savings for each income group varied drastically, with:

  • The rich getting much richer (the >$140K income household group overall grew cash savings from $2.3 Trillion in Q4 2019 to $4.9 Trillion in Q1 2022).

  • While the lower $50K income households also doubled their cash savings, their total value was significantly less (from $0.2 Trillion to $0.4 Trillion)

McKinsey’s July 2022 report notes

“Low-income households are just now starting to see their bank accounts shrink, with cash holdings reduced by 0.5 percent between the fourth quarter of 2021 and first quarter of 2022.”

New York Times Aug 8’22 article provides important insights:

“America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases. Because such a big chunk of their budgets is devoted to food and housing, lower-income families have less room to cut back before they have to stop buying necessities."

"Some are taking on credit card debt, cutting back on shopping and restaurant meals, putting off replacing their cars or even buying fewer groceries.”

McKinsey’s research asked about future spending intent and finds that >$100k Income are not planning to restrict much, while those with <$100K, plan significant cuts to discretionary purchasing but continue to buy necessities.

Also important to note that across all income groups, older generations have a higher inclination to be cautious and cut back vs younger.

Brands must know their consumers and shoppers deeply to determine the best strategies to cater to the bifurcated groups ... serving those that are struggling with meaningful price/pack options, but not lose out on trading up those that can and will spend more.



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