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After one month where it appeared inflation might be cooling, the increase in consumer prices across the US economy reached a new 40-year-high in May. This came at a time when consumer sentiment is hitting all-time lows. Meanwhile, online inflation showed signs of cooling, but ecommerce is still feeling the effects of wider economic forces.
Here’s a look at the latest consumer-focused economic data:
Consumer Price Index: New highs
Price spikes in the US economy set a new record in May. The US Bureau of Labor Statistics released the following data about increases in the Consumer Price Index (CPI) for the month on Friday:
- The CPI rose 1% month-over-month in May, after a .3% increase in April.
- The CPI rose 8.6% year-over-year in May, following an increase of 8.3% in April. This was the largest increase since December 1981.
- Energy prices continued to rise, with this index up 34.6% year-over-year. The increase in fuel oil costs was a new record for this metric, which dates to 1935. The index nearly doubled, rising 106.7% year-over-year.
- Food costs rose 1.2% month-over-month, after a .9% increase in April. The increase for food at home rose 1.4% month-over-month, which was its fifth consecutive increase of at least 1%.
- Core inflation, which sets aside food and energy costs, rose 6% year-over-year in May. Notably in consumer goods, apparel was up .7% month-over-month after falling .8% month-over-month in April. Household furnishings rose 8.9% year-over-year, and .4% month-over-month, per the US BOL.
Taken together, the report indicates that inflation’s march upward continues. This is happening even as the supply chain bottlenecks of the last year that were among the most prominent root causes of inflation are beginning to ease. And it follows the Federal Reserve making moves to hike interest rates by 75 points over the last month.
Following this news, the National Retail Federation urged the administration of President Joe Biden to move in another area that can affect prices: repealing tariffs on goods from China.
“Independent researchers and government agencies agree that ending tariffs is the fastest way to relieve the pressure of higher prices that American businesses, workers and consumers are facing every day,” NRF President and CEO Matthew Shay said, in a statement. “While the Federal Reserve continues with its long-term strategy to stem inflation, we need the administration and Congress to move forward on steps to lower prices that can be taken immediately. Repealing tariffs is one of those steps and one of the most effective and meaningful.”
When it came to online prices, however, there were signs that ecommerce is providing some shade as the heat continues to rise.
Adobe Digital Price Index: Increases cooling off
The Adobe Digital Price Index change over time. (Courtesy photo)
The Digital Price Index released this week by Adobe told a different story of online inflation for April, with rise in prices continuing the trend of slowing that began in April. Here are the key topline numbers:
- Online inflation increased 2% year-over-year in May. That’s down from increases of 2.9% in April and 3.6% in March. Prices were down .7% month-over-month, falling from the .5% increase in April.
- Of the 18 consumer categories tracked by the Adobe DPI, 10 saw prices decrease year-over-year in May. This includes a 6.5% year-over-year decrease in electronics, and a 6.5% year-over-year decrease in toys.
- Apparel, a closely-watched category due to rising prices over the last two years, saw prices increase 9% year-over-year, but were down 1.5% month-over-month.
- Groceries, which is the ecommerce equivalent of the broader food category, continued to see elevated inflation. Prices rose 11.7% year-over-year, which was a record high for the category. With this, groceries dethroned apparel as the category with the highest price increase for the month.
A summary of digital price increases. (Courtesy photo)
Another closely-watched metric during this time of inflation is consumer spending. Purchase of goods surged over the last two years, which made supply chain bottlenecks more acute. Even with prices rising over the last several months, spending has remained strong.
According to Adobe, online spending continued to rise in May. Its data shows consumers spent $78.8 billion online for the month, topping April’s total by $1 billion for 7.1% year-over-year growth. That rise outpaces April, which had 4.5% year-over-year growth.
Consumer sentiment: Record lows
Online inflation tends to be lower than the measure for the wider economy, but they can mirror each other. This month shows the trend lines moving in opposite directions, as the CPI ticked back up, while the DPI cooled off.
It could be interpreted as a sign for consumers that even as prices tick up in stores, ecommerce might be a place they could seek out lower prices. There may be some relief there if prices are start to come down, and opportunities for ecommerce platforms and brands to attract shoppers. After all, price is one area where ecommerce has long sought to provide an attractive alternative to in-person shopping.
But it's worth noting that what’s happening in the wider picture influences ecommerce, too. Alongside rising inflation, there are reports of slowing ecommerce spending as big platforms like Amazon, Walmart and Shopify reported losses. Executives attributed this to a return to in-person shopping and a shift toward spending on essential goods at a time of rising prices.
Also on Friday, the University of Michigan Survey of Consumers reported that preliminary data for June showed consumer sentiment at its lowest recorded value. It declined 14% and reached lows that aligned with the 1980s recession. Of those surveyed, 46% of consumers attributed their negative views to inflation. They are seeing gas prices go up. They still see supply shortages. They are beginning to make choices as a result. No matter where they are shopping, this plays a role.
“Despite the modest increase in consumer spending online, an uncertain economic climate and rising costs in core areas like groceries are putting a hamper on overall demand,” said Patrick Brown, VP of growth marketing and insights, Adobe, in a statement. “Slower consumer spending on discretionary items has driven slower, single digit ecommerce growth since March, and this pullback mirrors the easing in online inflation.”
Yet it is all setting up a summer in which price will matter. For one, rising inflation will mean consumers seek out lower prices.
They may have plenty to choose from.
Big box stores and other major retailers are flush with inventory that is only arriving now as a result of supply chain backups. But consumer spending shifted from the popular casual wear, big-ticket items and home goods of the pandemic restriction period to cosmetics, dressier clothes and luggage that’s needed to head to the office, social events and vacation. Retailers are getting set to introduce discounts as a result. Target made their plans along these lines plain this week, and others are expected to follow. Prime Day is around the corner, as well, putting deals in focus for a week (or more) in July. Private-label brands are emerging as an option.
Month-to-month data helps to fill in the picture rather than paint the full scene. Inflation is still an economic force shaping the economy now, just like it was at this time last month. The latest figures are a sign that it's not going anywhere soon. Balancing rising costs and attentiveness to price could be key for brands and retailers seeking to navigate it. Plan accordingly.
Trending in Economy
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.