Why won't consumers stop spending?

Always problematic for bond investors, inflation’s return to the front pages this decade has been increasingly framed as the consumer's chief nemesis. Prices are higher, borrowing costs have increased, and many households continue to express frustration about the cost of everyday necessities. Yet consumer spending remains remarkably resilient. Are observers focusing on the price side of the equation and overlooking the income side? We know that consumers may not make spending decisions based solely on what things cost—they often make decisions based on how confident they feel about earning a paycheck tomorrow. And while inflation remains uncomfortable in the post-Covid era, the labor market continues to provide a level of security that was absent during much of the period between the Global Financial Crisis and the pandemic.

The recent inflation-employment dynamic

From 2007 through 2020, core inflation as measured by the Consumer Price Index (CPI) averaged just 1.6% annually. On the surface, that sounds like an ideal backdrop for consumers. Prices were relatively stable and purchasing power faced fewer headwinds than it does today. The challenge was that job security often felt far less certain.

For consumers ages 25-34—a key spending cohort—the unemployment rate averaged 5.4% during that period and peaked near 9% in 2009. Labor-force participation hovered around 77%, spending considerable time closer to 75%. The quits rate told a similar story. Between 2009 and 2012, the rate sat at or below 1.5%, indicating workers were generally reluctant to leave an existing job. Few people voluntarily quit when unsure where the next opportunity will come from. In other words, prices were known, but income prospects were less certain. Consumers may have faced less inflation, but caution often prevailed because the consequences of losing a job felt significant.

Pandemic to present: higher inflation, better prospects

The last several years have brought a very different set of circumstances. Inflation surged to 5% in 2022, declined to 4% in 2023, and settled around 3% in subsequent years. Despite significant progress from the peak, inflation remains above the levels many consumers grew accustomed to prior to the pandemic. Tariffs, energy costs, and other supply-side pressures have also made a sustained return to 2% inflation difficult.

So why has spending remained resilient? One explanation is that consumers continue to view the job market as relatively healthy. For the 25-34 age cohort, unemployment recently stood at 3.7%, below the long-term average of 4.8% since 2000. Labor-force participation has remained above 80%, noticeably stronger than during much of the 2007-2019 period. The quits rate, while down from its 2021 peak near 3%, remains around its long-term average. Workers are still willing to leave jobs voluntarily, suggesting confidence in their ability to find new opportunities.

Are consumers adapting?

Consumers may not like higher prices, but they are generally more willing to absorb them when they believe their income stream is secure. A worker who expects to remain employed—or perhaps secure a better job—approaches spending decisions differently than one worried about layoffs or stagnant opportunities.

None of this means consumers have become indifferent to inflation. Instead, they may have become more selective. We know that technology has made comparison shopping easier than ever. Consumers are better able to evaluate prices across retailers, compare products, and seek alternatives. Value has become increasingly important, but value is not synonymous with the lowest price. In grocery stores, consumers regularly choose among premium, private-label, organic, convenience-oriented, and budget options. Similar dynamics play out across apparel, travel, fitness, and entertainment. Lifestyle preferences also increasingly influence purchasing decisions. Health, wellness, convenience, and personal identity often compete with price as drivers of consumption.

Winners and losers across industries

Companies that deliver a compelling value proposition—whether through price, quality, convenience, health benefits, or brand appeal—continue to capture consumer dollars. Those that fail to justify their place in the household budget are finding it harder to compete.

For bond investors, the key takeaway is that inflation alone may not be sufficient to derail consumer activity. As long as employment conditions remain healthy and workers retain confidence in their ability to generate income, spending can remain more resilient than traditional inflation-focused narratives might suggest. The challenge is that resilience is unlikely to be distributed evenly across the economy.

This environment reinforces the value of active management and fundamental research. Consumers are increasingly selective with their spending, rewarding companies that can clearly demonstrate value—whether through price, quality, convenience, innovation, or brand strength—while penalizing those that struggle to differentiate themselves. The result is a wider dispersion between potential winners and losers across industries.

At the same time, forecasting inflation remains difficult. While pandemic-related supply disruptions have largely faded, new influences—including tariffs, energy price volatility, geopolitical developments, and substantial AI-related capital spending—have introduced fresh uncertainty into the inflation outlook. Rather than a straight path lower, inflation may continue to follow a more uneven trajectory that keeps both consumers and policymakers on alert.

Against that backdrop, we believe the Federal Reserve is likely to remain patient until clearer evidence emerges that inflation is either sustainably moderating or reaccelerating. For fixed income investors, this argues against reaching aggressively for risk. Instead, an emphasis on high-quality securities, disciplined sector selection, and a short duration profile continues to offer an attractive balance between income generation and risk management. More broadly, a market characterized by resilient consumers, uneven inflation, and heightened policy uncertainty should create an environment where selectivity matters—and where active investors can be well positioned to capitalize on opportunities as they emerge.

Read more about our current views and positioning at Fixed Income Perspectives

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