Inflation is even pinching the middle class now

Even amid hopes that we are at "peak" inflation, it's clear that consumers on both sides of the Atlantic are buckling under the weight of higher prices.

Until recently, most of the pain has been concentrated among lower-income households. But lately the pressure has been spreading to more affluent shoppers too.

Kohl's Corp. last week blamed its second profit warning in three months on its core middle-class customers becoming more cost-conscious — noting that people were making fewer trips to its department stores, spending less when they visited and trading down from national brands to cheaper private labels. Late Tuesday, Nordstrom Inc., which appeals to a more upmarket customer base than most retailers, cut its full-year outlook, because the lower end of that base were retrenching, for example those shopping at its Rack off-price business.

Some of the wounds at Kohl's are self-inflicted. It made some questionable fashion choices, such as betting big on athleisure just as Americans started dressing up again. But a change in mid-market spending is plausible. In July, middle-income earners suffered the biggest contraction in their spending power, according to Morning Consult. Even among higher earners, fewer reported having money left over after paying monthly expenses, according to the consumer-intelligence company.

Spending Squeeze
The share of US adults who had money left over after paying monthly expenses fell across all income groups in July

That may explain why wealthier Americans are becoming more penny-pinching. Last week, Walmart Inc. Chief Executive Officer Doug McMillon said households earning more than $100,000 were making more frequent trips to its big-box stores.

It's a similar picture when it comes to restaurants. Although the most-stretched diners may be spending less at fast-food joints such as McDonalds Corp., their wealthier counterparts are visiting them more. Chipotle Mexican Grill Inc. said last month that higher-income customers were trading down from pricier eateries. Dine Brands Global Inc., the owner of Applebees and IHOP, also said it was seeing slightly fewer customers with household incomes below $50,000, whereas visits from customers bringing in more than $75,000 were up significantly, and the middle cohort was flat to slightly up.

While high-earners spent more on restaurants in June than a year earlier, according Morning Consult, they are starting to pull in the purse strings at the margins. For example, fewer households with annual incomes of $100,000 or more reported ordering takeaway food several times a week. This may reflect the fact that they are spending more time out of the house, but it could also be that inflation, together with high borrowing costs and depleted savings, are taking a toll.

Take It Or Leave It
Even wealthier Americans are cutting back on takeaways

Not only are consumers trading down to value-oriented retailers and restaurants, they are also changing the types of products they buy or putting fewer items in their baskets. In retail parlance, this is known as "dialing out" inflation, so that the amount shoppers spend on food each week increases by a level less than the headline rate of inflation.

Savvy Shopping
Inflation has driven more Americans to find ways to cut their grocery bills

Lower-income consumers are still doing the most to control their food budgets. For example, they are more likely than wealthier shoppers to buy private-label products, according to Morning Consult. (Higher-income brackets do clip coupons just as much however.)

But the switch into supermarket-owned brands is so vast that it's unlikely to be confined to one income class. US private-label grocery sales accelerated further in July, according to IRI. In Europe, food-price inflation is expected to have ramped up private-label sales in western European countries in July and August. It helps that supermarkets have developed more premium in-house brands. For example, Aldi, the privately held German retailer that is expanding across the US, has its Specially Selected range of gourmet foods, including sourdough bread and maple syrup.

Filling the Cart
Sales of private label products accelerated in July, led by beverages and chilled food

Tyson Foods Inc., the US's biggest meat producer, said shoppers had begun to swap premium steaks for cheaper cuts of beef. And Beyond Meat Inc. said consumers were shifting from meat alternatives — which are still more expensive than animal proteins — back into the real thing. In leaner times, consumers are less likely to experiment with alternative foods such as fake meat. That's a blow to retailers and food companies that have piled into plant-based foods, salivating over predictions from analysts at Barclays Plc that the market could be worth about $140 billion globally by around 2030.  US sales of meat alternatives fell 8.8% in the year to Aug. 7 according to IRI.

Of course, many consumers continue to spend, either because they are not yet feeling the pinch or they're simply unwilling to go without life's treats, from a Starbucks coffee to a Canada Goose coat. Nordstrom Inc. said this week that wealthy continued to splurge on new outfits and accessories, while Macy's Inc. said those earning $150,000 and above continued to spend "at very strong levels."

If inflation has peaked, a further contraction in spending power may be avoided. Walmart said sales were stronger in late July and early August, reflecting lower gas prices and schools returning to in-person learning. That bodes well for latter part of the year, which holds important spending occasions such as Halloween and the winter holidays.

But if the recent uptick proves to be a false dawn, expect more changes to buying habits — and not just among the most strained. Even US luxury could get caught in the crossfire. In fact, if things deteriorate, the next shoe to drop could be designer.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times. @AndreaFelsted

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.