Since 2022, European consumers have been facing the highest rates of inflation in decades. For many younger Europeans, it has been the highest in their lifetimes. Overall, consumers have been resilient during this inflationary period. However, looking deeper into the data, some consumers are having to make choices around what they are spending on. These changes in consumer behavior have created a "high-low" economy where the middle of the economy is squeezed out by high-end spending at one end and low-cost spending at the other.
What has caused this change in consumer behavior? Energy and food prices have driven inflation in Europe since late 2021. As a result, consumers have been allocating more of their budget to these essential items and have been reducing spending elsewhere. [1]
Essentials-driven inflation affects consumers differently based on their income level. High-income consumers have been able to absorb the higher cost of essentials and continue spending in other areas, such as high-end travel and luxury. Their spending on food and energy represents a relatively small proportion of their consumer basket, and they are more likely to have built up savings cushions during the Covid-19 pandemic to dip into. Meanwhile, less affluent consumers, with less disposable income, have needed to cut back on discretionary spending to afford the higher cost of essentials. [2]
Consumers have also adjusted to higher prices of essentials by trading down or buying cheaper alternatives. But once again, affluent consumers did not need to compromise as much. We can see this divergence in average spend per transaction, which fell less among affluent cardholders than standard cardholders.
A larger share of consumers now shop in more than five grocery stores a month compared to 2019 and even 2022. The shift relative to 2019 may mainly reflect increased card usage and acceptance. But recent increases since 2022 in the number of grocery stores coincides with the surge in inflation and suggests that consumers are shopping around to find better deals.
As affluent consumers shrug off essentials-driven inflation, middle-income consumers trade down from mid-market retail to lower-cost alternatives. These cheaper options are familiar to low-income households who already mainly frequent low-cost retailers, but they are unable to “trade down” and so face challenging budget decisions. Middle-income consumers, with less disposable income available to absorb higher food and energy prices, trade down from mid-market retail to lower-cost alternatives.
Our “bella figura” index of spending covers fashion spending on clothing, footwear, luggage, jewelry and watches in the largest European markets. We clustered retailers into three categories: luxury, mid-market and mass market. The high-low economy emerges at the start of the inflationary period in late 2022 when mid-market spending underperforms luxury and mass-market spending. [3]
A similar trend is visible in the restaurant sector, where consumers appear to have shifted their spending from full-service sit-down dining to fast food. The increase in fast-food share of restaurant spending is generally more pronounced among standard cardholders than affluent cardholders. It is also more pronounced in countries with higher inflation rates, such as those in Central and Eastern Europe, rather than countries like Switzerland, where inflation has been much lower.
This trend is also visible in the grocery sector. Discount supermarkets have gained market share, primarily driven by standard cardholders, while affluent spending at upscale supermarkets has held up.
Inflation has peaked in Europe, and prices are now rising more slowly than wages in several European economies. What will consumers choose to do with this extra money? In theory, their choices could reverse the trends described in this blog. However, the persistence of elevated "core" inflation, which excludes prices of energy and food and so is more stable than headline inflation, could make affluent consumers more price-sensitive over time. If they trade down from luxury to mid-market brands, a "bottle economy" could result with a constricted top end.
In addition, higher interest rates are now the main economic headwind, and their full impact will take several months to really affect consumers. Higher rates could affect more affluent consumers by lowering the valuations of assets like real estate and equities to create a “negative wealth effect.” Higher rates also can affect consumers of any income level by increasing the cost of financing a mortgage or a credit card balance. In this respect, the higher rates associated with core inflation could have similar effects to essentials-driven headline inflation by eating up consumer wallet share.
Footnotes
1 Source: CEIC
2 Source: Mastercard Economics Institute analysis of aggregated & anonymized transaction activity
3 Source: Mastercard Economics Institute analysis of aggregated & anonymized transaction activity
About the Mastercard Economics Institute
Mastercard Economics Institute launched in 2020 to analyze macroeconomic trends through the lens of the consumer. A team of economists, analysts and data scientists draws on Mastercard insights — including Mastercard SpendingPulse™ — and third-party data to deliver regular reporting on economic issues for key customers, partners and policymakers.
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