Inflation makes a woeful entry into consumers’ budgets this holiday season

After the pandemic deeply influenced consumers’ holiday plans and spending in 2020 and 2021 – record-high inflation is the top concern for holiday celebrations in 2022.

We take a look at the recent report by Morning Consult that sheds light on how consumers plan on managing their expenses and the shift in consumer spending trends as we inch closer to the holiday celebrations and wrapping up this year.

The survey shows that though consumers are feeling the pinch of higher prices, they are trying to keep the holidays festive. Inflation is likely to curb consumers’ shopping and spending habits, which will result in a pullback on discretionary purchases to keep their expenses in check.

Americans are most inclined to credit and debit cards when they make purchases, however, in the last couple of years, Buy Now Pay Later (BNPL) has become a popular choice for payments among younger consumers. Customers are provided the flexibility to pay in installments, while retailers witness shopping cart sizes increase. This year, older consumers have shown interest to follow in the footsteps of the younger generation.

With all the expenses that typically rack up during the year-end holiday season, steering clear of overspending is challenging for many. 

However, the chart above shows how the situation now is nothing like the previous year since average to low-income household consumers are more mindful of their expenses as they combat record inflation.

Different demographics, different concerns

The financial stress is felt most by low-income families with already tight budgets, people living paycheck to paycheck, 20% of women, and 22% of Millennials. 

Moreover, 20% of Gen X is showing signs of pressure that weighs more heavily on them than other adults as members of this age group edge closer to retirement. People belonging to this generation are choosing to bring down their discretionary spending and delay major purchases, in an effort to keep up with their retirement savings and not backtrack.

Better money habits

Up until recent years, a significant portion of Americans didn’t adhere to a budget because they either found it inconvenient or had difficulty staying within their budget limit.

But this is changing. The proportion of people developing an effective budget plan has increased in one year from 45% to 51% in 2022. This cohort analyzes their financial situation, sets targets, and gets back on track to achieve their financial goals.

The age group that has altered their approach to money the most – including their financial priorities, behaviors, and money consumption habits – is Gen Z. Gen Z adults are ambitious and aim to establish their financial footing. The study showed that 44% of them have started to budget throughout the year, feeling the effects of high inflation on their daily costs. 

Preferred mode of payments

i) Cards – debit or credit?

Even though holiday shopping will look different this year, consumers in better financial shape are still planning to spend – but they’re careful about where each dollar goes. 

Consumers pointed to credit cards as their preferred method to pay for large purchases, providing them convenience, enhanced security, and the opportunity to earn rewards like points, miles, and cash back on purchases.

But when it comes to small and medium gifts, food, and mundane items, debit cards are the first choice among US adults.

ii) All eyes on BNPL?

Credit cards have long been one of the most popular and deep-rooted methods of making payments in the US, however, credit card interest rates are growing increasingly high, turning consumers in favor of buy-now-pay-later. 

This is an attractive option for a variety of reasons – there's no minimum payment, flexible installments, avoiding interest for some time, no merchant fees, no need for a high credit score to qualify to purchase, and the convenience of using a payment method that is integrated into online customer journeys and shopping apps.

This leads to nearly 30% of US users considering using BNPL services to cover holiday expenses, as opposed to 18% of adults who intend to get a new credit card for the same purpose. 

Younger generations continue to form the majority market for BNPL, and going forward 40% of Gen Z and 43% of Millennials plan to pay with BNPL services. Other demographics including 12% of baby boomers are slowly catching up to jump on the buy now, pay later trend to have an economical, yet enjoyable upcoming holiday season.