Why has consumer spending held up so well during a period of huge and punishing inflation? As it turns out, the long-term impact of the covid lockdowns was most notable for the lowest income demo who saw their hourly wages increase the most relative to all other earners. While this momentum is slowing, this development continues to have important implications for inflation prospects and the start of the 4Q22 corporate earnings season.
Many employees in low-income cities (who tend to be older) retired after being put out of work during the 2020 lockdowns according to ADP Research. Many others also learned how to survive on a single salary (augmented by government benefits & part-time work) and did not feel the need to return full-time after the economy fully re-opened. These decisions, which were facilitated by the low cost of living in these cities, created a worker shortage that fueled job shopping efforts with the remaining workforce for ever higher paying jobs. As the lower-income demo tends to spend more of their pay, these wage gains have translated into higher consumption and, resultantly, higher inflation but also higher corporate earnings than would otherwise be expected.