World governments and central banks responded to the coronavirus pandemic in 2020 with unprecedented stimulative fiscal and monetary policy. So much surplus money and easy credit to help bolster a struggling economy is going to eventually create side effects.
The side effects of those policy measures (including outsized inflation, product shortages, and rising wages) came home to roost in late 2021 and into 2022. Recent earnings reports suggest more and more companies are really starting to feel it. Efforts to get this off-kilter economy back on a steady path are hurting consumers, which drive a majority of the U.S. economy these days. Higher prices on everything from groceries to airfares to car prices and apparel have many investors concerned about what it will lead to, i.e. recession.
Image source: Getty Images.
In that regard, the latest quarterly results from the world's largest retailer, Walmart (WMT 0.57%), could provide some insight into how consumer behavior is evolving.
Prices are rising faster than income
In Walmart's first quarter, which ended on April 30, it reported net sales of $141.6 billion. That was up 2.4% from the same quarter in the prior year. Remember that in Q1 2021, many consumers had extra cash following several rounds of fiscal stimulus and other temporary tax credit-related policy adjustments. This year, instead of stimulus and tax credits, consumers were hit with higher prices on many of the products they purchased.
According to the Bureau of Labor Statistics, the Consumer Price Index jumped by 8.3% in April. In other words, consumers were paying roughly 8% more to attain the same goods they bought in April 2021. Typically, when prices go up, demand decreases. How is it Walmart's sales increased then?
US Inflation Rate data by YCharts
Walmart CEO Doug McMillon elaborated on how customers are responding to rising prices in the company's earnings conference call on May 17:
Inflation is lifting the average ticket, and our transaction count in stores went up slightly versus last year. Overall basket size is up, as you would expect, but units per basket are down a bit. Price leadership is especially important right now and one-stop shopping becomes more than just convenience, people are paying over $4 a gallon for fuel.
Those changes are not surprising. With fuel prices higher, consumers make fewer trips to the store and buy more on each visit. Furthermore, the overall cost of purchases increases because it costs folks more to buy the same amount of goods. If fact, inflation could mean fewer items are purchased but sales rise because each item is price higher.
Of course, such a pattern is unsustainable unless consumers' incomes rise at at least the same rate as inflation. So far, that's not what's happening.
The chart below shows that U.S. personal income rose by 0.42% in May, which comes out to 5% on an annualized basis. With inflation (8.26% annualized) so much higher than income (5% annualized), consumers like those that shop at Walmart have to borrow or dip into savings to continue buying the same amount of goods and services they purchased last year.
US Personal Income MoM data by YCharts
What this could mean for investors
So far, many consumers have been able to absorb this inflation/income discrepancy. Part of the reason for that is that overall consumer savings were robust over the past couple years after several stimulus checks, boosted unemployment benefits, and monthly child tax credits in 2021.
US Personal Savings data by YCharts
This suggests that consumers overall can maintain their spending for several months more even if elevated inflation keeps biting into purchasing power. If inflation can be brought back under control relatively quickly, retailers like Walmart may not take a sizeable hit to their sales. It's not exactly great news, but it does have the potential to be positive news for this retailer and others.
