Inflation,Huge,Drag,Energy,Cos business, insurance Inflation’s a Huge Drag as Energy Costs Transform Consumer B

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Back in July, a survey of 4,525 consumers pointed to yet another cleardownturn in U.S.consumer spending – despite the injection of $150 billion in tax rebates tostimulate the economy. In that July survey, we focused on the key reasons why consumers arespending less. As the following chart shows, the chief culprits are Inflation (56%; up 4-pts) and Higher Energy Costs (56%; up 7-pts). These twin factors have skyrocketed since January in terms of their overallnegative impact on consumer spending. Meanwhile, other consumer behaviors like Reducing Debt (24%), Saving More Money (18%) and Investing More Money (8%) have declined.But there’s far more to this story. We’ve taken a close-up look at theimpact of inflation and higher energy costs on consumers.First, in our July survey, we asked respondents to tell us what effect – ifany – higher energy prices will be having on their discretionary spending overthe next 90 days – and while 15% of respondents said rising energy costs werehaving a Significant Effect ontheir spending, an unprecedented three-in-five (60%) said they were having a Modest Effect.All told, that’s 8 points higher than in our previous survey of just twomonths earlier.In another related question, 12% of respondents said their driving had been“Very Much” affected by the rise in gasoline prices – a three fold increasesince the beginning of the year.But it's not just driving habits that have been altered by the rise ininflation.Whenwe asked consumers if rising prices in general had caused them to make otherchanges to their normal spending routine, one-in-two (50%) said yes. And amongthat group an extraordinary 68% said the number one change they’ve made is to Eat Out Less. Note that 52% also reported they're ShoppingMore at Discount Stores, and 41% said they’re Buying Lower Cost Items. Which brings usto perhaps the most interesting transformation of all – the “substitutionprinciple” – which includes everything from shoppers replacing their steakswith hamburgers, to buying off-the-rack clothes rather than designer labels. For example, respondent JLE0128 reports he is replacing expensive food itemswith less costly ones. “I’ve quit eating steak, lobster, and expensiveTex-Mex,” he writes. “I’m searching out all low cost options – eatinghamburgers, not ordering drinks or other costly extras with meals. I’m alsosticking with basic needs and avoiding anything not reasonably priced. No moreStarbucks – I now use McDonald’s for coffee."Member GAM91914 adds, “More pasta and rice dishes are being eaten, with lessdairy and meat.” Respondent PEN02292 says he’s "replaced organics at WholeFoods for generics at Ralph's” and RIC00696 is “buying more store branded foodsrather than national brands like Proctor & Gamble, Kraft and ConAgra.”DOM95250 says, “I now make peanut butter & jelly sandwiches to take towork instead of going out." Below are some other examples of how consumers are changing their habits andbehaviors to cope with overall inflation and higher energy costs.KON58654 writes, "Clothing and shoes are now from the discount store." SON03970 writes, "I now shop for clothes that are on clearance to save money." WEB18822 writes, "Discontinued $129.00 per month Time Warner digital cable TV service and went back to using a free antenna; changed cell phone plan from $120.00 per month down to $45.00 per month; eliminated storage space rentals." LIN02874 writes, "Buying auto parts to repair my car rather than spending money on a newer car." DMS93208 writes, "Wal-Mart clothes instead of Kohl's, Penney's, etc. in some cases." RGA52560 writes, "More discount internet shopping without tax or shipping to replace purchasing from local or national merchants. Shopping more bulk at discount warehouses. Track grocery sales and double/triple coupons." DRM1144 writes, "Bought a motorcycle instead of driving my SUV." BWH48924 writes, "Replaced gas for car with a bicycle a couple times a week." TRA3972 writes, "Going out to movie theaters – replaced with Blockbuster Total Access." ARL47234 writes, "Netflix used instead of going to movie theater." MRG02762 writes, "I brew my own coffee instead of buying Starbucks." CHI6274 writes, "Drink coffee at home." TFW6544 writes, "I stopped buying most wines, especially those over $15.00. Put off projects at home that I cannot do myself. No longer use any maid services and clean my own house!" DIC99036 writes, "I replaced a bank account that had built-in fees for services I rarely use for a no-frills free account." As U.S.consumers continue to make substitutions to compensate for the drag ofinflation and higher energy costs, both winners and losers are emerging.For example, although virtually all restaurants have taken a hit because ofslower spending during 2008, it’s the weaker chains have really taken it on thechin – the latest examples being Bennigan’s and Steak & Ale, which justfiled for bankruptcy.Other recent examples of stores losing market share due to consumer behaviorchanges include Best Buy (BBY; 9%) and the whole gamut of Mall giants such asMacy's (M; 8%) and Sears (SHLD; 5%).At the same time we are witnessing a large-scale migration to discountstores and wholesale clubs – with Wal-Mart (WMT; 25%) and Costco (COST; 16%)among the biggest beneficiaries.Talk about substitution! Back in March, we first reported on a seismic Transformation in RetailShopping – led by sharply lower spending and higher inflation. That huge shiftby consumers to the discount retailers and wholesale clubs now appears to havesolidified into a permanent, long-term, secular trend.Jim Woods co-wrote this article.