Why Consumer Behavior Changes with Inflation
- Mia Bennett
- Sep 23, 2025
- 7 min read
Updated: Sep 24, 2025
Inflation’s Invisible Hand at the Checkout
At a Miami supermarket, shoppers linger in the aisles comparing the unit prices of milk, coffee and cereal. A few aisles away a woman scans the labels on paper towels, searching for the best value even as packages quietly shrink in size. Inflation may be easing relative to its post‑pandemic peak, but it still permeates every decision shoppers make, influencing what they buy, where they buy it and how they feel about the economy. Why do consumers behave differently when prices rise? The answer lies in a complex mix of economics, psychology and corporate strategy.
Inflation Is Down, But Perceptions Lag
After peaking above 9 % in 2022, U.S. inflation has cooled considerably. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) for all items rose 2.7% over the 12 months ending July 2025, while food prices climbed 3.2% [1]. Energy prices barely budged, with the energy index up just 0.2% [1]. Economists consider these figures relatively moderate, yet consumers remain uneasy.
Federal Reserve economists recently examined this disconnect by matching survey responses from 10,000 households with their verified purchase data. They found that consumer sentiment stayed unusually low in late 2024 even though unemployment was low and incomes were rising [2]. Many respondents over‑estimated the inflation they experienced; the more they thought prices had risen faster than their incomes, the worse they said they were doing [3]. In other words, perceptions of inflation, not just inflation itself, shape how people feel about the economy.
Crucially, the Fed study revealed that what consumers say and what they do can diverge. Even those who said they felt worse off were buying more goods in 2024 than in 2019 when purchases were adjusted for inflation [4]. Since mid‑2022, consumer sentiment has moved more closely with concerns about high prices than with income growth [5]. During inflationary episodes, including the 1970s, households put more weight on rising prices than on wage gains when assessing their own situation [5]. That means people can continue spending while simultaneously professing pessimism.
Trading Down and Eating In: The Everyday Response
When budgets feel stretched, the first reaction is to cut discretionary spending. Mariam Beruchashvili, a marketing professor at California State University, Northridge, observes that households are eating out less, postponing home purchases and canceling memberships. Shoppers are shifting away from name‑brand goods to store‑brand items and buying fewer snacks or gourmet foods [6]. This trend of “trading down” is a direct response to persistent price pressure: even though inflation has cooled, prices remain roughly 19% higher than before the pandemic [7]. To stretch their budgets, many consumers now brew coffee at home rather than paying \$6 for a café drink [8].
Harvard Business School’s Chiara Farronato and Emily Williams describe similar patterns. They note that although inflation has slowed, some categories like electricity and new cars remain elevated; consumers in cities such as Miami or Atlanta feel they have experienced higher price increases than official statistics suggest [9]. On average, prices for consumer goods are about 19 % higher than pre‑pandemic levels [10]. As a result, households gravitate toward discount stores, opt for store brands and reduce non‑essential spending [10]. Harvard researchers see this as a shift toward “value‑seeking behavior,” where people continue buying essentials but look for deals and abandon luxuries. [11]
Rebalancing Spending
It would be wrong to portray consumers solely as frugal. McKinsey’s State of the Consumer 2025 report shows that even amid inflation, spending has remained resilient and the relationship between consumer sentiment and spending has weakened [12]. Many consumers simultaneously trade down in one category and splurge in another [12]. For example, a household might buy generic groceries and delay a smartphone upgrade while still paying for a vacation or entertainment subscription. This patchwork of spending reflects a desire to maintain quality of life without exceeding budgets.
The timing of purchases also changes. McKinsey researchers note that shoppers have moved holiday shopping earlier, partly to spread costs over several paychecks and take advantage of deals [13]. Younger consumers, especially millennials and Gen Z, start shopping before October [14], while some baby boomers skip holiday shopping altogether [15]. High‑income households are more likely to keep or increase spending, whereas lower‑income groups pull back [16].
Trading Down at Restaurants and Retailers
For restaurants and retailers, these shifts are tangible. A Bank of America analysis of card spending found that customers continue to spend but look for cheaper options. Investopedia reports that chain restaurants like IHOP and Applebee’s see guests ordering fewer beverages and appetizers and choosing lower‑priced menu items [17]. Executives across industries observe that shoppers have been trading down to store‑brand products [18]. Crocs CEO Andrew Rees says low‑income consumers are “most sensitive to price increases” and sometimes stay home altogether [19].
Retail data show a similar story. The National Retail Federation reported that U.S. retail sales (excluding autos and gas) rose 1.5% from June to July 2025, reversing a decline, but analysts caution that the increase may reflect temporary factors like back‑to‑school shopping [20]. Overall, consumers continue to shop but are more calculated, chasing deals, utilizing loyalty programs and shifting to budget retailers.
Shrinkflation: Hidden Price Increases
Another force altering consumer behavior is shrinkflation, when manufacturers reduce the quantity of a product without cutting the price. The U.S. Government Accountability Office defines shrinkflation as product downsizing, noting that it became more common starting in 2022 [21]. Even though shrinkflation affected fewer than 5% of the items GAO studied, it raises per‑unit prices; paper towels saw per‑unit increases of 12% while coffee packages jumped 32% [22]. Research reviewed by the GAO suggests consumers are less likely to react to downsizing than to a direct price increase, partly because brand loyalty or inattentiveness makes them overlook the change [23].
Shrinkflation magnifies distrust: shoppers who notice smaller cereal boxes or fewer chips in a bag often feel cheated, reinforcing the perception that inflation is worse than official statistics indicate. As a result, they may devote more time to comparing unit prices, switch to bulk purchases at warehouse clubs or abandon particular brands. Some consumers see shrinkflation as evidence that companies are profiting from inflation, fueling resentment and calls for regulatory action. The GAO notes policy options such as labeling downsized products or standardizing unit price disclosures to improve transparency [24].
The Substitution Effect and Psychology of Inflation
Economists describe part of this behavior through the substitution effect, when relative prices change, consumers shift consumption toward cheaper alternatives. A simple example is switching from a branded coffee to a generic one or using public transit instead of driving when gasoline prices rise. The substitution effect is stronger for goods with close substitutes and for households with tight budgets; those with lower incomes are more likely to adjust purchases because they must stretch limited funds [25].
Yet inflation’s psychological impacts extend beyond textbook economics. Harvard economist Stefanie Stantcheva has found that people dislike inflation not only because it erodes purchasing power but also because they misattribute wage gains: workers often see raises as recognition of personal effort rather than as inflation adjustments. As the Fed note summarises, during inflationary periods consumers put more weight on higher prices than on higher incomes [5]. When people believe their income is not keeping up with prices, even when real incomes rise, they report feeling worse off. Moreover, perceptions of inflation vary widely by geography, age and political affiliation; some groups overestimate inflation because they pay more attention to highly visible prices like gas and groceries. These perceptions influence voting behavior and trust in institutions, complicating economic management.
Businesses and Policymakers Respond
Companies have not been passive observers. To retain customers who are trading down, brands are introducing value lines and promotional deals. Fast‑food chains like McDonald’s and Wendy’s have rolled out meal deals and smaller menu items. Retailers such as Target have launched “dealworthy” private‑label brands that emphasize affordability [26]. Many companies use data analytics to adjust prices by region and track consumer price sensitivities, a strategy Harvard’s Alexander MacKay calls balancing margins and volume [27]. Meanwhile, subscription services offer discounts for annual commitments, locking in customers before they churn.
Policymakers are also under pressure. The Fed has raised interest rates to cool demand and bring inflation back to its 2% target, but its own research shows that sentiment may remain low even as inflation falls. Some lawmakers advocate stronger price transparency rules and investigation of “price gouging,” though economists caution that supply shocks and global factor, from wars to weather, have driven much of the recent inflation. The GAO suggests labeling downsized products and ensuring consistent unit price labels [24] to help shoppers make informed choices. Others call for expanded social safety nets to cushion low‑income households most sensitive to price increases [19].
Consumer Behavior Is Adaptive
Inflation does not simply make everything more expensive; it reconfigures how people live and shop. When prices rise, consumers substitute, trade down, or delay, but they also reallocate, cutting back on some things to afford others. The persistence of inflation’s psychological effects, even amid falling price growth, underscores the importance of perceptions: people tend to recall price hikes more vividly than wage gains.
Understanding these dynamics is essential for businesses trying to price products and for policymakers aiming to restore confidence. It requires acknowledging that inflation is experienced differently across regions and income groups and that consumers are not passive victims but active strategists. They might brew coffee at home while booking a vacation, clip coupons while splurging on a concert, or switch to generic cereal while paying for streaming services.
Inflation may be an invisible force, but its fingerprints are all over consumer behavior, from the unit price stickers in supermarket aisles to the skepticism in sentiment surveys. As the economy enters what McKinsey calls a period where “disruption becomes permanent,” understanding why consumer behavior changes with inflation will remain central to navigating a volatile world. [12]
Sources:
[1] Consumer Price Index Summary - 2025 M08 Results
[2] [3] [4] [5] The Fed - Tracking consumer sentiment versus how consumers are doing based on verified retail purchases
[6] [7] [8] [26] As Inflation Still Persists, Consumers Are Changing Their Behavior, CSUN Prof Says - CSUN Newsroom
[12] State of the Consumer trends report 2025 | McKinsey
[17] [18] [19] [20] Data Points to Solid U.S. Retail Spending. But There Are Plenty of Troubling Signs.
[21] [22] [23] [24] What is “Shrinkflation,” And How Has It Affected Grocery Store Items Recently? | U.S. GAO
[25] Substitution effect: Definition, examples, and economic impact
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Good read