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Oct 13, 2022

Inflation Starts To Impact Discretionary Spending

While the effects of inflation on consumer discretionary companies have been largely mitigated thus far, thanks to the post-pandemic reopening and pent-up consumer demand, the brunt of the aftereffects are yet to be seen, says a DBRS Morningstar commentary. ‘Economic uncertainty and increasing consumer conservatism equals challenging times for consumer discretionary companies’ says the negative recessionary forces of decreasing consumer real purchasing power and slowing economic activity are mounting and the impact is just beginning to show. As such, the financial performances of companies within this sector could be pressured, especially for participants with more elastic product offerings and less ability to pass on further price increases without experiencing declining volumes. Since inflation began its swift upward trajectory at the beginning of 2021, wages and salaries have not kept pace with increasing consumer staple costs in Canada and the U.S. From January 2021 to June 2022, the average year-over-year (YOY) growth in the price of staple products in Canada, including food (4.2 per cent), shelter (4.9 per cent), and transportation (8.8 per cent), has increased at a higher rate than nominal wages and salaries (three per cent). While consumer savings and pent up demand have limited the impact of this discrepancy thus far, consumers in North America have shrinking discretionary income and declining purchasing power, which is an indication of declining demand or higher elasticity of demand for discretionary products in the near to medium term.

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