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Will Inflation Reshape Gen Z’s Spending Habits?
In an article entitled “Gen Z Will Carry the Deepest Psychological Scars From Inflation,” Bloomberg analysts predicted that after living through a cost-of-living crisis during their formative years, Gen Z members are bracing themselves for inflation to persist in their lives.
Bloomberg based its analysis on Bank of England data that showed that after seeing double-digit price growth, inflation expectations among Gen Zers in the UK between the ages of 16 and 24 have climbed more quickly than any other age group.
Bloomberg wrote, “Economists call this an ‘experience effect,’ where people living through periods of volatile and high price growth in the 1970s and 1980s have those memories seared more deeply in their thinking than those who just know about it from history books.”
Speaking to Fortune, Dayo Abinusawa, founder of London’s Awa Business School and a former lecturer at Cambridge University’s Judge Business School, agreed with the findings. He said, “Gen Z will be left with psychological scars from persistent inflation due to increased uncertainty and anxiety. Young people are typically affected by inflation, as they are most likely to work part-time or in low-paid jobs.”
Other surveys also show inflation is taking its toll on Gen Z.
Bank of America’s 2023 Better Money Habits survey of nearly 1,200 Gen Z adults (ages 18 to 26) in mid-August found that the higher cost of living topped the list of barriers to achieving financial success, cited by 53% of Gen Zers. Of the respondents, 73% over the past year have changed their spending habits due to increased prices, including cooking at home more frequently rather than dining out (43%), spending less on clothes (40%), and limiting grocery purchases to essentials (33%). The vast majority plan to continue those spending habits over the next year, even as price pressures decrease.
A survey from U.S. Bank taken this past May found inflation, recession, and higher interest rates to be the three top concerns among Gen Z respondents, although millennials (ages 27 to 42) shared many of these same feelings.
“Younger generations are dealing with inflation, high interest rates, and high prices, but they also inherited a much different world than older generations: since 1980, college tuition has increased by 169%; the average price of a home is up 540%; and average student-loan debt now sits at $37,000,” said Gunjan Kedia, vice chair of wealth, corporate, commercial, and institutional banking at U.S. Bank. “Despite these headwinds, they are passionate about investing in causes they believe in.”
Among younger cohorts of Gen Z, Piper Sandler’s 46ths Semi-Annual Generation Z Survey of over 9,000 teens found that “self-reported” spending was down 1% year over year and down 4% compared to last spring as inflation became the second most important political and social issue, cited by 9%, and second only to the environment, 18%.
Respondents also showed a growing price consciousness. The off-price channel increased 545 basis points year over year, with 14% of teens stating that it is their favorite shopping channel. Piper Sandler wrote in the study, “We think that spending pressure is causing teens to be more selective in spend and that off-price inventories are fresh and highly relevant.”
Discussion Questions
Will the recent inflation spike become a transformative event in the lives of Gen Zers and alter their purchasing patterns going forward? Are young people in the near term feeling the impact of inflation more than older generations?
Poll
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David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
Lisa Goller
B2B Content Strategist
Inflation transformed Gen Zers’ world view, including their sense of hope. Homes, high-paying jobs and low debt seem out of reach for them.
Young people feel conflicted. They love Apple, Nike and Starbucks but they can’t afford these premium brands as often as they would like.
Price consciousness, value shopping and reduced spending help Gen Z manage the high cost of living and the anxiety it provokes.
My two girls are squarely in the demographics cited above and yes, prices are absolutely taking a psychological toll and darkening their opinions on their ability to ever buy a house or save enough – and my oldest has a phenomenal job and makes a good living. In some ways, it can be a positive as so many people spent like drunken sailors when interest rates were essentially zero for so long. This could cause them to save more. However, home prices, rent, and car prices (ave. new car now over $50k) are beyond the pale and just being able to exist comfortably is highly concerning for me as a parent.
What the GenZ group is experiencing is not unlike what both GenX and the Millennial generations have experienced since the early 2000s. We have experienced recessions, the 2008 housing crisis, and geopolitical and macroeconomic disruptions. Additionally, the global economy has been significantly impacted by the pandemic, the global supply chain disruptions, and now two active wars in Ukraine and the Middle East.
Conscious consumerism is alive and well with GenZ, Millenials, and GenX for multiple reasons. The rising cost of living and rate of inflation have resulted in consumers seeking value-centric products and services that fit within their budget. Additionally, GenZ is leading the charge in navigating to brands that align with their beliefs on both ESG and sustainability.
Most middle-class families have to make tradeoffs between buying from brands they love that are premium priced to those that are now within their budget. GenZ and Gen Alpha are currently experiencing this, which will lead to lifelong habits of balancing their budgets in the face of relentless inflation.
The effect of high interest rates and persistent student debt will be felt across the retail industry for years to come. Young people who aren’t purchasing homes will need less furniture. I’d expect young people to delay starting their families. Retail’s trade associations should very carefully consider which politicians to support.
The impact of inflation on Gen Zers may be causing a shift from conspicuous consumption to conscious consumption. As products become more expense relative to their income, younger generations will become more frugal and place more focus on the importance of relationships than things. Consumers will shift their spending from luxury and brand names to private label, off-price retail offerings, or used goods. It may even start some consumers to shift to an anti-consumerism sentiment.
While inflation is unusual in terms of recent history, it is not a new phenomenon. Inflation rates in the 1970s and 1980s were far higher than today. People lived through those periods and coped. The same applies today; people adjust and adapt and their memories are short-lived once inflation moderates and wages rebalance. That said, I do think that house price inflation has been a problem for a very long time (even before the current period of general inflation) as it has been outstripping wages and making homes less affordable for younger consumers.
Whereas GenX had to grow up with 17% interest rates, 9% inflation, and massive unemployment in the 80s, at least housing and tuition were nominally reasonable. Gen Z has unreasonably high up-front costs for education and where to live after graduation, but their employment prospects are good and inflation is flattening out. Even with those inversions, if analysts want to make psychological projections, look at GenX behavior over the decades because we are still dealing with decades-long PTSD.
What if we don’t think of experiencing inflation as causing “psychological scars”? Instead, let’s see it as first-hand lessons in fiscal responsibility. For retailers, the lesson is that Gen Z shoppers will likely be quite price-conscious. Discounters are benefiting from their business now, and even upscale brands should keep this in mind for the future. Price will almost always be a major piece of purchase decisions. Because of inflation, it should get even more attention from now on from retailers who serve Gen Z customers.
No, this inflation spike is not a transformative event for Gen Zers, since it is a moderate amount of inflation, historically. Inflation from 1974 and ’79-80, was double digit, and easily eclipses today’s growth as well as the double digit interest rates. Adapt or perish…
The bigger challenge isn’t inflation it’s the undermining of the fundamental tools that previous generations enjoyed. Higher education is not only unaffordable, but the quality or usefulness of that education is in question by employers today. Things we took for granted just 20 years ago, like finding an affordable apartment or staying in a job more than 5 years now feel unreachable by younger generations. And don’t get me started on health care. Add to that the growing isolation epidemic stoked by social media and we have an environment ripe for transformation. But in all dark scenarios there is a ray of light and this is no exception. Gen Z will push for changes that will improve quality of life for us all, like better work/life balance, better environmental stewardship and more personal and meaningful experiences across every aspect of life.
Good God! if ever there was a snowflake alert moment here on RW that sets off Boomer’s inner-get-off-my-lawn rants this should be it: psychological “scars” ?? from a single year – OK, a single year plus – of high-single-digit increases. I’m not sure whether to laugh at this idiocy or be concerned people are actually taking it seriously. The kds will be all right (now get off my lawn!)
Gen Zers’ who I’ve had the privilege to come to know have shared how much more careful they are being, or want to be with their money over the previous generation. They’ve seen and feel inflation stresses around, and understand how expensive college, housing, food, insurance, transportation has become. I see Gen Zers’ splurge occasionally on something important they love, maybe an experience or a memory, or fun with food flavors, but other luxuries like brand name clothing take a back seat. Savings and managing money feels more ingrained in this group of up and comers.
I regularly work with college students and young professionals. They are more aware of inflation than any generation before them. Their values are different, prioritizing time and flexibility and focusing in many cases on experiences over things. They will lead the way towards right-sizing purchases.
In my opinion, the recent spike in inflation may likely have a transformative impact on the lives of Gen Zers. As mentioned, the rising cost of living is causing Gen Z to change their spending habits, with many opting for cost-effective choices, these early experiences with inflation may shape their financial decisions in the long run, making them more price-conscious and selective in their spending.
Eventually, the memories of dealing with high prices during their formative years could influence Gen Z’s purchasing patterns, potentially leading to a more frugal and cautious approach to their finances in the future.