A Very COVID Christmas: The Pandemic’s Impact on Festive Spending
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A Very COVID Christmas: The Pandemic’s Impact on Festive Spending

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festive spending infographic

The Pandemic’s Impact on Festive Spending

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From mass job losses to not seeing family and friends for months on end, the COVID-19 pandemic has pushed people to their limits in 2020.

As an incredibly difficult year draws to a close, people are starting to accept that this festive season will be anything but typical. But while a portion of consumers have reined in their spending due to financial uncertainty, others are spreading Christmas cheer by indulging in gifts for their loved ones.

The graphic above from Raconteur explores how consumers’ festive spending in the U.S. and UK has changed as a result of the ongoing pandemic.

Will the shift trigger permanent changes in the retail industry?

Festive Budget Breakdown

According creative agency Kinetic, half of all UK adults surveyed believe this Christmas is more important than ever before, with that figure rising to three quarters for 18-34 year olds.

However, given consumers’ concerns over the future of the economy, they are expected to reduce spending during the festive season. In the U.S. for example, spending will decline by 7% to $1,387 per household.

When it comes to how consumers plan to spend their hard-earned cash, some interesting insights emerge. As many have saved significantly on socializing and travel—which is down 34% year-on-year—they plan to put this money towards items for themselves instead of gifts and gift cards for others. These items include clothes, at-home entertainment, and home furnishings.

It therefore comes as little surprise that the global online home decor market is estimated to grow at a compound annual growth rate (CAGR) of almost 13% between 2020-2024 with revenue of over $80 billion.

Dampening the Christmas Spirit?

Unsurprisingly, over half of all U.S. consumers are anxious about shopping in-store this holiday season. The vast majority have health and safety concerns, with 71% being the most worried about dealing with others who aren’t taking the virus seriously. This is closely followed by being around, or too close to others in stores.

Therefore, when it comes to physical shopping, people feel more comfortable in local stores or at outdoor markets and much less so in shopping malls.

Safety in Online Shopping

Considering this change in mindset, almost 60% of UK consumers said that they will be shopping online more this Christmas.

Here’s a closer look at how they plan to shop differently during the 2020 holiday season:

 Shopping In-storeShopping Online
More12%59%
Same28%29%
Less60%12%

But while ecommerce sales are expected to spike over Christmas, delivery speeds and shipping delays are also major concerns for consumers. As a result, many of them started their shopping much earlier this year to avoid disappointment. In fact, over half of all UK shoppers had started their Christmas shopping before November had even arrived.

Bidding Adieu to 2020

The end to a painful year for many can’t come soon enough. But boarded-up storefronts, and “for sale” signs serve as a harsh reminder of the fragility of the retail sector and its reliance on consumer sentiment.

Even as we march forward guided by the hope of an effective vaccine, the future of retail remains uncertain. For consumers, their confidence will build once more, but how they choose to spend their money following the festive season will be more important for businesses and the economy than ever before.

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Household Income Distribution in the U.S. Visualized as 100 Homes

This visual breaks down U.S. household income categories as 100 homes, based on the most recent data from the U.S. Census Bureau.

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Household Income Distribution in the U.S. Visualized as 100 Homes

Income inequality and wealth disparity have been frequent topics of conversation, even before the pandemic upended the economy.

Now, rising inflation and interest rates, and a possible recession on the horizon are bringing these societal divides into sharp focus.

In the above visualization, U.S. households are parsed out into a neighborhood of 100 homes and then grouped by income brackets, using recent data from the U.S. Census Bureau.

The Neighborhood Breakdown

American households vary widely on their respective incomes. The largest cluster of homes, representing nearly 20% of all American households, are in the $25-$49.9k income bracket.

Here’s a look at the share of households in each income bracket and the number of homes they represent.

Household IncomeShare of TotalNumber of Homes
Under $25K18.1%18
$25K-$49.9K19.7%20
$50K-$74.9K16.5%17
$75K-99.9K12.2%12
$100K-$149.9K15.3%15
$150k-$199.9K8.0%8
Over $200K10.3%10

In our hypothetical neighborhood, 18 of the households are in the lowest income bracket. People in this category have a wide variety of jobs, but personal care aides, cashiers, food and beverage positions are some of the most common. As a point of reference, the poverty line for a family of four currently sits at $26,496.

On the flip side, in this small community of 100 houses, 33 earn six figures and typically have at least one family member in a corporate or medical role.

The American Middle Class

The middle class in America has shrunk significantly in the past 50 years, going from 61% of adults being middle income in 1971 to 50% in 2021.

Here’s a look at the economic class breakdowns by annual household income, based on households with three people (Note: the average U.S. household has 2.6 people):

  • Upper class: >$156,000
  • Middle class:  $52,000-$156,000
  • Lower class: <$52,000

Although these definitions and conditions don’t align exactly with the buckets we use in the main houses visualization, they come pretty close.

In the neighborhood of 100 homes, 38 homes could be considered low income, while 18 are high income. Meanwhile, sitting in the $50-149.9k middle range of household income are 44 homes.

The Larger Trends

The pandemic had an extremely adverse impact on earnings and income worldwide, and the U.S. was no exception.

Median household income decreased 2.9% to $67.5k between 2019 and 2020, the first decrease since 2014. Additionally, the number of people who worked full-time jobs, year-round decreased by around 13.7 million.

That said, when looking at the longer-term trend, the median income for those considered middle class has jumped by 50% over the last five decades. Here’s a look at the median incomes in each economic class in 1970 vs. 2020:

 1970 Median Household Income (in 2020 $)2020 Median Household Income% Change
Low Income$20,604$29,96345%
Middle Income$59,934$90,13150%
Upper Income$130,008$219,57269%

With a recession⁠ highly likely to occur in the U.S., and rising inflation causing increases in the cost of basic, everyday goods, budgets may get tighter for many households in America, and incomes are likely to be impacted as well.

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Interest Rate Hikes vs. Inflation Rate, by Country

Inflation rates are reaching multi-decade highs in some countries. How aggressive have central banks been with interest rate hikes?

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Interest Rate Hikes vs. Inflation Rate, by Country

Imagine today’s high inflation like a car speeding down a hill. In order to slow it down, you need to hit the brakes. In this case, the “brakes” are interest rate hikes intended to slow spending. However, some central banks are hitting the brakes faster than others.

This graphic uses data from central banks and government websites to show how policy interest rates and inflation rates have changed since the start of the year. It was inspired by a chart created by Macrobond.

How Do Interest Rate Hikes Combat Inflation?

To understand how interest rates influence inflation, we need to understand how inflation works. Inflation is the result of too much money chasing too few goods. Over the last several months, this has occurred amid a surge in demand and supply chain disruptions worsened by Russia’s invasion of Ukraine.

In an effort to combat inflation, central banks will raise their policy rate. This is the rate they charge commercial banks for loans or pay commercial banks for deposits. Commercial banks pass on a portion of these higher rates to their customers, which reduces the purchasing power of businesses and consumers. For example, it becomes more expensive to borrow money for a house or car.

Ultimately, interest rate hikes act to slow spending and encourage saving. This motivates companies to increase prices at a slower rate, or lower prices, to stimulate demand.

Rising Interest Rates and Inflation

With inflation rates hitting multi-decade highs in some countries, many central banks have announced interest rate hikes. Below, we show how the inflation rate and policy interest rate have changed for select countries and regions since January 2022. The jurisdictions are ordered from highest to lowest current inflation rate.

JurisdictionJan 2022 InflationMay 2022 InflationJan 2022 Policy RateJun 2022 Policy Rate
UK5.50%9.10%0.25%1.25%
U.S.7.50%8.60%0.00%-0.25%1.50%-1.75%
Euro Area5.10%8.10%0.00%0.00%
Canada5.10%7.70%0.25%1.50%
Sweden3.90%7.20%0.00%0.25%
New Zealand5.90%6.90%0.75%2.00%
Norway3.20%5.70%0.50%1.25%
Australia3.50%5.10%0.10%0.85%
Switzerland1.60%2.90%-0.75%-0.25%
Japan0.50%2.50%-0.10%-0.10%

The Euro area has 3 policy rates; the data above represents the main refinancing operations rate. Inflation data is as of May 2022 except for New Zealand and Australia, where the latest quarterly data is as of March 2022.

The U.S. Federal Reserve has been the most aggressive with its interest rate hikes. It has raised its policy rate by 1.5% since January, with half of that increase occurring at the June 2022 meeting. Jerome Powell, the Federal Reserve chair, said the committee would like to “do a little more front-end loading” to bring policy rates to normal levels. The action comes as the U.S. faces its highest inflation rate in 40 years.

On the other hand, the European Union is experiencing inflation of 8.1% but has not yet raised its policy rate. The European Central Bank has, however, provided clear forward guidance. It intends to raise rates by 0.25% in July, by a possibly larger increment in September, and with gradual but sustained increases thereafter. Clear forward guidance is intended to help people make spending and investment decisions, and avoid surprises that could disrupt markets.

Pacing Interest Rate Hikes

Raising interest rates is a fine balancing act. If central banks raise rates too quickly, it’s like slamming the brakes on that car speeding downhill: the economy could come to a standstill. This occurred in the U.S. in the 1980’s when the Federal Reserve, led by Chair Paul Volcker, raised the policy rate to 20%. The economy went into a recession, though the aggressive monetary policy did eventually tame double digit inflation.

However, if rates are raised too slowly, inflation could gather enough momentum that it becomes difficult to stop. The longer high price increases linger, the more future inflation expectations build. This can result in people buying more in anticipation of prices rising further, perpetuating high demand.

“There’s always a risk of going too far or not going far enough, and it’s going to be a very difficult judgment to make.” — Jerome Powell, U.S. Federal Reserve Chair

It’s worth noting that while central banks can influence demand through policy rates, this is only one side of the equation. Inflation is also being caused by supply chain issues, a problem that is more or less outside of the control of central banks.

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