As consumers enter the peak back-to-school shopping season (July through September), retailers and other consumer businesses are beginning to make room for backpacks, clothing, school supplies and other back-to-school needs. This season will certainly be different from last year, as consumers are in a more challenging financial environment than a year ago.
RSM’s senior industry analysts explore this topic in our four-part blog series. For the first installment, we touch down on the child tax credit.
With inflation readings at 40-year highs (9.1% on a year-over-year basis in the most recent release), consumers’ pricing power has diminished, driven by grocery and gasoline prices which are accounting for a larger share of monthly budgets. To sustain sales volumes experienced from the start of the pandemic, consumers have been forced to begin drawing down on record savings accumulated over the last two years, most notably among lower income consumers.
However, for lower income consumers, inflation is not the only significant financial change from a year ago affecting spending on discretionary goods. Adding to the challenge is the discontinuation of enhanced child tax credit payments from last year, when families received monthly deposits from the government from July through December. While only a fraction of overall consumer spending, these payments contributed to a 17% year-over-year growth in real consumer spending (adjusted for inflation) for back-to-school shopping categories (stationery, clothing and footwear, and educational books). This year-over-year growth has not been experienced in any of the previous five years, the peak being a 6% growth in 2020.
As families approach back-to-school shopping, middle market retailers and other consumer companies must focus on consumer needs and pricing, ensuring the right inventory is on hand. Additionally, it is more important than ever that companies understand their target demographics through the use of enhanced data analytics tools to appropriately target consumers.
While the lack of the child tax credit may affect overall consumption at an income level, ensuring that the right products are available to target consumers will be key to retailers’ sustained growth.