Human behaviour in an inflationary market is not always as you might expect.
Does inflation and stock shortages decrease spending or does it sometimes increase spending? It’s hard to avoid the impression that our economy is in trouble. In the inflationary market, Media dominates our smartphones, computers, and televisions with stories about inflation, interest rate hikes, and supply chain issues. Our own experiences with empty shelves, long wait times, and rising prices serve only to confirm the concerning picture painted in the media. This constant exposure to vivid signals of financial uncertainty alters the way our brains make decisions, and changes the way consumers choose to spend their money.
Worsening future conditions
The threat of worsening future conditions throws our brains into loss-aversion mode. The areas of the brain that deal with avoiding loss act fast and are sensitive to emotion. Looming price rises and widespread supply chain issues nudge us to buy today instead of waiting and potentially paying more or missing out altogether. This is particularly true for durable goods – things like cars and whiteware – and for long-life groceries (like toilet paper) that we simply couldn’t do without in future.
Merely anticipating inflation is enough to send consumers all over the globe into a purchasing frenzy. For retailers, this sounds like a win, but only in the short term. Buying to avoid missing out increases demand, places more pressure on the supply chain, and fuels further inflation.
The way our brains perceive value further drives an inflation mindset. Our brains covet things that are in short supply, because scarcity suggests others also value those things. Unusual absences on the shelves cause us to want those absent things more than we would have were they present. Missing out feels terrible, and this emotion causes our experience of supply shortages to stick in our memory, further fuelling predictions that grim times lie ahead. Our brains also tend to focus on dollar value rather than spending power, which makes inflation seem all the more serious.
Take the astronomical price of petrol as an example. Relative to income, petrol prices are not necessarily any higher than they have been in the past decade. But the dollar value of petrol has never before been so high, and it is this value that leaves a lasting impression. The psychological outrage over the high price of goods and services will cause consumers to buy fewer non-necessities, shop less often, and look around for alternatives. For businesses, consumers’ willingness to consider alternatives creates new opportunities – people are most likely to adopt new habits in times of substantial change.
Attract new customers
Now is the time to attract new customers, and also to pay special attention to existing customers who will inevitably be checking out other options.Strong signals of uncertainty focus our brain on the present, causing us to place more value on things that are available immediately, and to be less willing to wait for potentially better options. This has two important implications for consumer behaviour – consumers will be more likely to spend rather than save (if inflation hasn’t decimated their disposable income), and will choose to spend with suppliers who can offer something immediately.
This preference for instant gratification creates a challenge in the face of supply chain issues, but businesses can attract customers by rewarding purchases of out-of-stock items or delayed services with some small but immediate benefit (points, low-cost freebies, etc).
Reward vs Immediacy
When our brain is doing its most rapid reward-based decision-making, it pays little attention to the type of reward and places much more weight on immediacy. Growing attention on inflation and supply chain issues will inevitably change consumer decision-making and behaviour, but this needn’t cause businesses to suffer. Understanding how uncertainty impacts decision-making will help businesses to adapt, and to retain and attract customers.
Dr Sarah Cowie is a Senior Lecturer in psychology at the University of Auckland. Sarah is the Director of The Behaviour Lab, a research group that looks at how decisions and actions are influenced by experience and by the world around us.