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How is Inflation Expected to Affect Retailers for the Rest of the Year?

Buoyed by stimulus payments and a steep decrease in other luxury spending such as vacations and fine dining, jewelry sales skyrocketed during the pandemic. But after a strong recovery from the worst of the pandemic driven by higher wages and spending, the US economy is now mired in the highest inflation rates in 40 years.

Massive inflation (8.5% year-over-year) has limited household purchasing power, canceled out wage gains, and increased the prices of fuel and goods. Compounding those troubles are continued supply chain issues and the ongoing war in Ukraine. Jewelry sales have remained strong through it all, but will it last?

We are starting to see the effects of inflation on the retail sector. While March retail sales increased 0.5% over the previous month, real sales, after accounting for inflation, actually fell 0.7%. Jewelry sales, however, have remained strong, with 2022 first-quarter sales even outperforming 2021 fourth-quarter sales for many retailers. Meanwhile, gasoline and food sales have fallen in response to inflation-driven price increases, but sales related to the reopening of services and activities put on hold by the pandemic are rising. These categories include sporting goods, clothes, and electronics.

Effects on Consumers

Because of high fuel prices, consumers will opt to make fewer shopping trips, getting into the car only when necessary. A survey by consulting firm Alvarez & Marsal found that 59% of people were mostly or only shopping when there was something they really needed to buy.  And it's not only brick-and-mortar stores that are affected by inflation. Higher gas prices seem like they would lead to more ecommerce revenue, but online consumer spending decreased sharply as gas prices spiked.

As shoppers make fewer trips to the store and cut back on discretionary spending in the face of inflation, luxury purchases like jewelry may decrease for some households. The Alvaro and Marsal survey found that 57% of people making between $50k and $74.9k annually feel their desires are greater than their means. Wealthier consumers of luxury goods, on the other hand, will be less affected by rising prices, but the psychological effects of astronomical increases at the grocery store and at the pump may have them shying away from any big purchases.

Effects on Retailers

With fewer customers focusing more on basic needs and making shopping trips only when necessary, it will be more important than ever to make sure every customer who comes through the door leaves having made a purchase. To address this issue, many retailers expect to hire more salespeople during this time. It may seem counterintuitive, but more people on the sales floor offering help means more opportunities to make a sale.

These additional salespeople can help combat the psychological effects of political and economic uncertainty. The rising costs of food and fuel aren’t hitting wealthy Americans as hard, but inflation shakes consumer confidence regardless of tax bracket. Wealthier Americans might be able to sustain their spending levels, but their perception might be that they need to tighten the belt for a while. A larger, well-trained staff that can speak individually with each customer can assuage these doubts and fears by reminding them that these birthdays, anniversaries, engagements, retirements, and other life events are what’s important in life, and that they are worth celebrating. Fine jewelry isn’t something they are going to replace in six months like a pair of shoes; it is a valuable object that they will enjoy for a lifetime, and that their families might enjoy for generations to come.

Other consumers may have valid reservations about spending so much money during such an economically uncertain time. For these consumers, consider financing programs that will relieve them of some of the immediate financial burden of a luxury purchase.

Inflation doesn’t have to be all anxiety and uncertainty for your business. Jewelry sales are still strong, with prices at their highest points since the 1980s. These high prices are being driven by high demand and tight supply. But with high prices and higher costs for retailers comes the ability to charge more. For many retailers, volume is actually up this year, but if it drops, higher prices can make up for lower volume if you can figure out just how much consumers are willing to pay.

It’s difficult to make strong predictions about how this will play out over the rest of the year, but a business that can analyze its costs against the types of items they are selling, and manage their inventory accordingly, is more likely to ride out this wave of inflation to the end of the year, when inflation is expected to drop to 4.3%. The Fed predicts inflation will drop to a manageable 2.4% by the end of 2024.