Walmart’s rosy earnings announcement (CNN) this week was touted as a sign that consumer spending remains strong, and recession fears may be overstated. But what if Walmart’s good news reflects something different, and is really offset elsewhere in the economy?

The Issue

As various categories of prices have been moving up and down, much has been discussed regarding consumers’ compensating actions. When people had to pay more at the pump, expenditures on pretty much everything else suffered (or folks went into debt) to cover the difference. When gasoline prices came back down, folks reprioritized their spending once again. Spending in entire sectors can be monitored.

But a related article that was part of a recent reading list from the Chicago Booth Review back in June is worth a read if only to start a conversation. It discusses work done by PhD candidate Omiros Kouvavas completed on consumption data during the Great Recession with the intention of potentially applying it to the current period. (Today, supply constraints may make the “trading” part of this theory more difficult.) The phenomenon described is referred to as “trading down” or “trading up,” depending on whether you are talking about a downturn or an upswing in the business cycle.

The concept is pretty simple. During lean times, rational people may make trade-offs in the quality of the goods they are purchasing rather that simply purchasing less of what they normally purchase. Here are a few examples:

• Buying store brand versus name brand products
• Buying cheaper cuts of meat/protein
• Buying beans instead of animal protein
• Whole Foods customers shopping at their regional grocery store
• Regular grocery store shoppers moving to Walmart

Studying this phenomenon empirically is much more challenging. Researchers must rely on scanner data. Overall trends can be observed, like stores are selling less beef, but this data is collected in a manner to preserve anonymity of the customers. You can’t really track a particular customer’s trade-offs, nor can you track if a customer has switched stores.

Headlines

Here are a few articles discussing the topic.

• Rich People “Trading Down” to Applebees, IHOP as Inflation Surges (NY Post)
• McDonalds and Chipolte say customers are trading down and visitng less often as inflation hits budgets. (CNBC)
• Data Suggests Inflation-Impacted High Income Consumers are Trading Down. (Strata-Gee)
• Inflation-Hit Consumers are Trading Down to Chicken from Beef (Bloomberg-subscription may be required)

Lesson Ideas

1) After presenting the concept of “trading down” directly or by having students read any of the articles listed under headlines, have students brainstorm a more exhaustive list of examples of consumers “trading down.”

2) Have students list other ways inflation manifests itself to consumers, (like “shrinkflation,” fewer/different choices on restaurant menus, reduced levels of customer service or hours) and list the things they have experienced in their lives.

3) AP Econ students (Micro) can take a stab at reading the Chicago Booth Review and then discuss the challenges of building empirical models and collecting data to support them.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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