You Helped Slow Inflation — Here’s How
Written by
G. Brian Davis
Edited by
Daria Uhlig
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The July CPI inflation reading came in at 2.9%. That marks the first time since 2021 that it clocked in under 3%, as inflation continues slowing toward the Federal Reserve’s 2% target.
High inflation over the last three years has left many Americans frustrated with an otherwise healthy economy, and it remains a flashpoint in the presidential election. So why is inflation slowing? How have high interest rates and other macroeconomic factors affected consumers’ behavior, and in turn, eased price growth?
Lower Spending on Non-Essentials
Consumers haven’t stopped buying — but they have grown more cost-conscious.
“Consumers’ habits do not change automatically just to reduce inflation,” noted author and real estate developer Jose Berlanga. “They change their buying behavior because their personal circumstances force them to do so.
“As our grocery bills, rents, utility bills and credit card payments all go up, we find ourselves needing to spend less on non-essential items. This becomes a domino effect: once millions of people experience similar circumstances, consumer confidence drops together with actual consumption.”
And that’s exactly what’s played out in 2024. A study by McKinsey & Company found lower consumer confidence coupled with lower spending on non-essentials.
Shift Toward Cheaper Alternatives
Consumers have also switched from more expensive goods and services to lower-cost alternatives.
Personal finance expert Todd Stearn, founder of The Money Manual, explained how this halts and even reverses price growth.
“When prices climb too much, many consumers will switch to a cheaper alternative. And if it’s a product they don’t need, or at least don’t need right now, they may stop buying it altogether. If enough people deem these products too expensive and stop purchasing them, companies stop raising prices and may even lower them to spur sales.”
He pointed to a 2024 study by Adobe showing the shift from higher- to lower-cost online purchases. Splitting purchase categories into quartiles, Apple found huge jumps in spending on the lowest quartile of prices, with drops in spending on the higher quartiles. The cheapest quartile, of personal care items, saw 96% growth year over year.
Self-Fulfilling Prophecy of Lower Expected Inflation
When consumers expect high inflation, they tend to rush purchases to buy before prices rise even higher.
The opposite also holds true: When they expect low inflation or deflation, consumers delay purchases.
A July survey by the Federal Reserve found sharply lower inflation expectations among consumers. Over the next three years, consumers expect a median inflation rate of 2.3%.
Unsurprising, the survey also found lower spending expectations among consumers. In fact, median spending expectations dropped to the lowest level since April 2021.
When consumers pull back on spending, companies lower prices to spur sales.
Reluctance To Buy Homes
Real estate prices follow the same market forces.
“When enough homeowners decide to just stay put rather than deal with inflated home prices and high interest rates, home prices eventually stop increasing and may start dropping,” Stearns said.
Sure enough, a July report from Zillow found that home value growth hit a 14-year low.
Final Thoughts
Inflation-weary consumers have started changing their buying habits — and that’s turning the tide in the battle against inflation. Stearn wrapped it up: “If you were part of this trend of more conscientious spending: Nice work! You helped lower inflation.”
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