Inflation and Consumer Confidence

What you think matters, says Peter Atwater, author of the new book The Confidence Map.

by Kristen De Deyn Kirk

An adjunct professor at William & Mary and president of Financial Insyghts, which advises investors and Fortune 500 companies, Peter Atwater is a sought-after commentator on consumer confidence and decision making. His observations and research have been featured in The New York Times, The Wall Street Journal, Financial Times, Barron and other media outlets.

His upcoming book, The Confidence Map, due out in fall 2023, explores how changes in confidence change how we feel. His advice in the book: Stop focusing on how you lost confidence because the cause is not important. It’s the feelings that really matter, not the source. Instead, if things feel uncertain, and you feel powerless, recognize that those moments do pass. You’ve experienced them before, and, unknowingly, have figured out how to get back to your comfort zone.

Following are edited excerpts from Professor Atwater’s conversation with CoVA BIZ about inflation, consumer confidence and spending:
CoVa BIZ: How much do you think inflation matters to most people as they’re shopping for the holidays?
Atwater: I can’t speak to the holidays, but let me share how I think of inflation. Inflation is far more a psychological issue than an economic one. Why inflation matters is it generates feelings of vulnerability [the opposite of confidence] and, at the extreme, feelings of scarcity that ‘I don’t have enough money.’ Being vulnerable changes not only how we feel, but how we think and all of the choices we make. If I look at the low end of the economy, they almost always have stacked vulnerabilities [financial vulnerabilities, racial vulnerabilities, educational vulnerabilities, health care vulnerabilities]. It’s not one thing that is holding them back: it’s six or seven.

How does this translate to spending habits?
The challenge today is that gas and food, where we’ve seen the highest levels of inflation, are highly inelastic—meaning no matter what the price is, I have to buy it. I feel incredibly imprisoned by food and energy inflation. It’s almost like I’m being waterboarded by it. Its price is visible everywhere, all the time. Its economic impact is relatively minor, when you look at the dollar and cents of it, but its psychological impact is overwhelming. It’s a constant reminder that ‘I am vulnerable.’

So you anticipate that those on the lower end of the economy are spending less on things beyond their basic needs?
What we’re seeing is two kinds of behavior at the low end—curtailment of discretionary spending and increased credit card use. ‘If I can’t…cut back, then I’m going to have to use debt to make it through.’ For those at the low end, it’s been not just food and energy inflation, but [also] residential housing inflation, child care inflation. Wages are not keeping up with that level of cost increase—which is one of the reasons why you’re seeing a major increase in the demand for unionization [from workers on the frontline throughout COVID]. They’ve had enough.

Would you say the upper middle class’s spending habits were impacted by COVID?
[Their] ability to transition to work-from-home eliminated an enormous amount of vulnerability. ‘I don’t have to be afraid. I can isolate. I can choose when I go out and with whom I have to interact.’ I’m the person who came up with the term ‘the K-shaped recovery.’

Can you explain that?
What we saw [after the height of the pandemic] were two very different economic experiences. Those at the top rebounded quickly [the leg of a K pointing up]. Not only do they have jobs, but with all of the fiscal and monetary stimulus, the markets rebounded quickly. Whereas for those at the bottom [the leg pointing down], they had none of those benefits.

Is there anything that retailers can do to help consumers feel more confident?
What consumers need is stability in prices. They need stability in the political environment. They need calm, peace, a tempering of emotions, a sense of stability…This is an environment where regaining and preserving the confidence that customers have with you is imperative.

It boils down to the certainty that customers have in their interaction with you. Is your business delivering what it promises to its customers? Can customers be certain that they’re getting from you what they want when they walk in the door? Do customers feel empowered when they interact with you, in your business—or is this just yet another experience where they feel powerless?

Businesses that can demonstrate to their customers that they are concerned about their customers’ confidence will really benefit in these moments.

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