Top Effects of Inflation on Consumer Behavior: 2023 Inflation Trends

Discover the top effects of inflation on consumer behavior in 2023 with trends identified through data-backed research and analysis.

Inflation has been a constant in recent years, causing prices across categories to soar. Although surging costs peaked in mid-2022 at a 9.1% inflation rate and inflation has cooled for 12 months straight, the Federal Reserve continues to raise rates to combat inflation — and many economists say there’s much more work that needs to be done.

No one actually knows when this multi-year streak of inflation will end. What’s clear, however, is this: Inflation is impacting consumer behavior, and companies need to continue adapting customer experience (CX) to entice consumers to keep doing business with them.

2023 Inflation Trends Explaining the Effects on Consumer Behavior

Understanding the effects of inflation on consumer behavior starts with market research data. While you might already have an idea of how inflation is impacting spending habits, it’s critical to rely on data-proven insights.

Medallia analyzed a range of data to uncover the state of inflation today — including credit and debit transactions, smartphone foot traffic data, and survey responses. In all, we’ve collected and analyzed millions of data points to understand inflation trends and the effects of inflation on consumer behavior in 2023. You’ll realize exactly why consumers are shifting behaviors and connect those changes to actions your brand needs to take.

Here’s what you need to know about the state of inflation in 2023 through data-backed research and analysis.

Most U.S. incomes aren’t keeping up with inflation

Inflation rises but rarely do wages follow — and this places a significant burden on consumers when choosing where to spend their money.

Only around one in five U.S. consumers (21%) has experienced a raise or some sort of wage increase that is either at or above the level of inflation. In particular, the portion of individuals whose incomes increased above the rate of inflation is only around one in 10.

Household savings are down and debt is up, with consumers struggling to make ends meet

Finances for households in the United States are worse off than at the start of 2023. Savings are down, and debt is up — another worrisome trend brought on by the effects of inflation. Since wages haven’t kept up with inflation, consumers are forced to use credit cards and take on loans to pay for products and services. 

Research found that 30% of consumers have more current outstanding debt as of June 2023 compared to the beginning of the year. In addition, 50% of households are either just barely making ends meet or are unable to do so, up from 40% in August 2021.

That said, in a bright spot of resilience among consumers, the proportion of individuals reporting that they’re tapping into their savings or adding to their debts isn’t a much larger group than in 2022, which means inflation doesn’t seem to be driving more unsustainable behavior than before. 

Inflation isn’t just media hype

As many as 39% of U.S. consumers say that people in their social circles discuss inflation. Consumers might not discuss their personal finances in full detail, but the topic of inflation is one coming up regularly in conversations with family and friends.

“[Inflation] is a real thing that people are seeing and paying attention to and aware of,” explains Andrew Custage, Head of Insights at Medallia. “It’s not something that brands, at this point, can kind of sneak by without some sort of acknowledgement that prices are going up across the board.”

Since consumers don’t always use the term inflation themselves and instead refer to the rising costs of items they spend money on, such as gas or takeout food, brands should make sure to speak about rising costs using the language their customers use.

Inflation is affecting how consumers shop, the brands they choose to do business with, and perceptions of customer service

First, the bad news for brands: Almost half of consumers feel companies are trying to use higher costs or labor shortages as an excuse to cut back on customer service, and less than a third of survey takers say they notice better customer service from brands that charge a higher price. In addition, less than half of consumers (one third) feel they’ve received more personalized experiences compared with a couple of years ago.

Price comparison shopping is driving whether consumers decide to buy online or in person.

The value of customer experience can pay off for brands, even in the face of inflation, as consumers say they prioritize brands that invest in the customer experience.

The biggest factor influencing purchase decisions is whether price has changed

Consumers are closely monitoring how much money they spend today, and so any changes in price for the products and services they normally buy have a significant impact on their purchase decisions. 

As more pressure is applied on consumers due to limited finances, it’s important to soften price increases by making product or service modifications that reduce costs for the business. As things currently stand, however, nearly half of consumers already believe that brands are using inflation as an unfair excuse to cut back on customer service. That’s why, whatever strategies businesses employ, it’s key to be transparent and authentic during this time of transition, says Custage.

Behind price, another major factor influencing purchase decisions is the effort to pay down debt.

As a pointer for CX teams and other departments: Do more than solely understand and measure experiences. Bill Staikos, SVP of Executive Advisory at Medallia, says, “You really do need to bring in financial data and behaviors into your overall thinking and strategy.”

Doing so helps organizations act with more agility and have a greater impact as the economic climate shifts and evolves, he adds.

Consumers are cutting expenditures to focus on necessities

Inflation can’t be escaped completely, but consumers are doing their best to lessen its impact on their wallets and lifestyles.

Brands must realize that must-have products and services win out over nice-to-haves. But that doesn’t mean nice-to-haves are doomed amid times of high inflation. As long as customer satisfaction (CSAT) is strong, customers are inclined to treat any brand’s offerings as must-haves.

Medallia’s analysis has found that 37% of consumers are switching to fewer (or cheaper) goods, 36% are avoiding eating out at restaurants, and 22% are avoiding travel and leisure activities.

In conjunction, consumers are also offsetting inflation by getting financial help, switching jobs, and taking on additional work.

How Brands Win Over Customers in the Age of Inflation

Brands in every industry deal with difficult market conditions. As soon as inflation increases, it impacts businesses and consumers simultaneously. Everyone faces higher costs, and the competitive landscape for every brand becomes fiercer.

To compete, brands need to focus on gaining an advantage. One area that’s ripe for innovation is within digital experience (DX), particularly since these digital channels help lower the cost to serve. Brands need to design digital experiences to drive engagement and bottom-line business outcomes, according to Staikos.

Digital is often the start of the customer journey, where consumers seek out the best prices and research companies’ options for “buy now, pay later,” online purchasing and pickup, returns and exchanges, shipping, and more. Convenience is an important factor too, as consumers spend wallet share where they can easily find what they’re looking for and get questions answered right away.

Since consumers have unlimited information at their disposal and the ability to compare their options in a matter of seconds, it’s more important than ever for brands to keep tabs on consumers’ digital behavior.

“What consumers are doing in a company’s app or website, that’s digital body language — and being able to identify that digital body language, identify where the friction is and what’s causing customers to either jump off the website, not buy the product, not complete the purchase journey, this is all really important data to be able to capture,” says Staikos.

Brands can use these insights to evaluate and improve experiences in the aggregate and at the individual level, personalizing interactions for customers.

Getting smarter about customer segmentation is another area of growth for brands.

“Different people, whether that’s by age or by income level, have different needs and intentions,” explains Staikos.

That’s why brands need to not only monitor the overall customer experience, but understand the differences in that experience at the cohort level.

“If you’re starting to see big swings in your customer base — with things being much different than they were six months or a year ago — you need to think about the experience that’s being delivered. Those new customers may ultimately leave if they feel like they are not being valued, or if they feel like you don’t understand them or their needs,” adds Staikos. “That’s a really big risk for brands.”

It’s also important to understand what companies your brand’s experience is being compared to, and how your brand stacks up. Sharing these insights with your product team can improve products for individual groups based on their needs.

While brands may not realize it, price needs to be considered when evaluating the experience that’s being delivered to customers. If customers feel like they’ve had a great experience, but find the product or service to be overpriced, they’re going to think twice about doing repeat business with your company, Staikos explains.

Organizations need to make sure that they’re striking the right balance of delivering on customer expectations at the right price for what customers are willing to pay, he adds.

“Brands need to be careful as they are seeking ways to be competitive on cost,” says Custage. Once a brand’s identity has been established with consumers, over years or decades, that can’t be compromised by a rapid price and service change, he adds.

Respond to the Effects of Inflation on Consumer Behavior

There’s good news for businesses, too: Not only do consumers feel optimistic about the savings and debt they expect to have by the end of 2023, Medallia’s findings underscore what previous studies have found — investing in experience yields strong returns for brands. Why? Even in the age of inflation, consumers still value great experiences and are willing to pay a premium to have their expectations met.

Ready to take a deeper dive into the effects of inflation on consumer behavior? Check out the Medallia Market Research webinar, Insights on Inflation: Are Consumer Behaviors Changing Over Time.