Holiday Shopping: Inflation-Weary Consumers Wait for Deals

Dec 6, 2023

As inflation and student-loan payments cut into household spending, consumers favor travel and experiences and plan to spend less on big-ticket items.

Now that Thanksgiving and the holiday-adjacent shopping days of Black Friday and Cyber Monday have passed, the traditional U.S. holiday shopping season is officially here. Thus far, retail sales seem sluggish relative to last year. However, this is not a surprise—sales match expectations from retailers and consumers, based on results from the latest Morgan Stanley Research AlphaWise surveys gauging consumer plans for holiday shopping. In fact, 38% of consumers checking in after the November holiday said they thought prices were worse than last year.


“Inflation, tighter lending standards and higher interest rates have taken a bite out of many households’ disposable income, keeping overall holiday spending down,” says U.S. equity strategist Michelle Weaver. “Additionally, the resumption of student-loan payments after a three-year pause has diminished buying power for some 26.6 million consumers this holiday season.”


As many as 69% had indicated they were waiting for deals before they started shopping, hoping to take advantage of discounts of up to 30%. Still, 37% of consumers surveyed said they are set to splash out about the same amount as last year, when spending was muted after the pandemic boom, but with an emphasis on experiences rather than products. Shoppers also indicated more willingness to wait for favorable pricing: immediately after Thanksgiving, only 16% claimed to be done with most of their holiday shopping and 21% said they would hold out until mid-December for better deals.


“We are expecting weaker results in goods-oriented industries,” says Weaver. “Airlines remain the one bright spot, with consumers continuing to prioritize holiday travel.”


Here’s a closer look at key holiday-shopping trends:


1. Inflated Shopping Budgets

Only 25% of shoppers have a larger holiday shopping budget than last year (compared to 27% who are set to spend less). The top reason for higher spending was inflation, followed by simply buying more gifts. Net declines across categories are in line with last year, suggesting that spending priorities remain similar. “Unlike 2022, store shelves are not overflowing with excess inventory, which may result in fewer deals for shoppers,” says Weaver. “On the other hand, retailers have to offer competitive prices to get shoppers in the door—and into the checkout line.” And consumers are still showing price-sensitivity this year. If retailers raised prices, only 14% of consumers wouldn’t change spending plans, versus 17% last year.


2. Spending Stymied by Student Loan Payments

About 22% of U.S. households include federal student loan holders, with 41% having begun paybacks—leaving less money for seasonal splurges. “Among households with federal student loans, 26% say resumed payments are the reason they will pull back spend,” says Morgan Stanley Economist Sarah Wolfe. Through the end of October, student loan repayment totaled $6.9 billion (equal to roughly 2% of control retail sales) with monthly payments averaging $350 per borrower.


3. Goods Are on the Decline, Except for Toys

Shoppers are favoring experiences and services over gifts, “a behavioral shift that could disproportionately hurt retail spending,” says Wolfe. Luxury goods, sports equipment, home and kitchen, consumer electronics and beauty products are most likely to see a drop relative to last year. One bright spot: toys, which could emerge as a relative beneficiary this holiday season. Toys are only second to apparel in terms of categories in which consumers are most likely to increase spending this year (16% of respondents vs. 20% for apparel).

Roughly 19% of U.S. households with annual incomes of $100,000 or higher intend to spend more on toys this year, relative to 15% last year.

4. Flying High

Demand for travel has seen “no signs of slowing,” and all roads point to a busy holiday travel season, says Morgan Stanley’s Freight Transportation and Airlines analyst Ravi Shanker, who covers freight transportation and airlines. Resilience and demand for air travel is supported by data from the U.S. Transportation Security Administration, which reports robust usage. Passport issuance set a record in 2023, showing that people want to travel more now than ever, and recent consumer surveys have shown that travel intentions over the next six months remain stable. Furthermore, the need to get away isn't just for high-income flyers. “Mid- and upper-income households continue to display higher intentions to travel compared to lower-income households,” says Shanker. “However, lower-income households have remained relatively stable compared to last month's survey, which demonstrates that travel intentions remain robust amongst all consumers and not just high-income households.”


5. Online Spending Takes a Hit

Rising costs, including inflation and higher rates, have had the most impact on lower- and middle-income households, which are slowing their discretionary spending and trading down purchases to less-expensive items. In contrast, high-income households “have driven an unprecedented amount of consumption in 2022 and 2023 as the services economy recovered,” Wolfe says. Although most of the weakness in e-commerce has been attributed to low-income consumers, the proportion of high-income shoppers who said they plan to increase online shopping spending is roughly in line with the proportion of those who are cutting back. That means high-income consumers won’t help to offset the decline in ecommerce that started this summer and is expected to continue into the holiday shopping season. Wolfe expects high-income consumption to slow in 2024, although it will “still remain stronger relative to lower-middle income consumption, as the main drivers for spending—including housing wealth and white-collar jobs—remain solid.


Contact your Morgan Stanley Representative or Financial Advisor for the full reports “Holiday Shopping Preview: Is Santa Stuck in the Chimney,” (Nov. 9, 2023), “Black Friday 2023: Sluggish, but Suspected” (Nov. 27, 2023) and AlphaWise US Consumer Pulse Survey Wave 49 (Dec. 4, 2023)

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