Millennials Lead a Trade-Down Wave as Inflation Bites Hardest

US consumers are trading down at the highest rate since 2021, and millennials are leading the shift, according to a new Bank of America Institute report.

"Consumers are still spending, and they're adapting to inflation, but adapting is not the same thing as escaping it," Taylor Bowley, an economist at the Bank of America Institute, told Business Insider. "They're still finding ways to stretch their budgets by trading down where they have those choices."

How the Bank of America measured the shift

The institute built a spending tier composite from consumer card data across four categories: apparel, dining, grocery, and travel. It paired that spending with the median incomes of shoppers at premium, standard, and value stores. The composite has trended downward for several years.

That decline means "more households are shifting spending to value tier merchants" rather than high-end stores and experiences, the report said.

The pressure comes from several directions. Gas prices have surged since the start of the Iran war. Mortgage rates have spiked since the start of the year, pushing homeownership out of reach for many. The Fed hiked interest rates in September to fight inflation, then held rates steady in October while it waits for more data.

What do consumers themselves say?

The University of Michigan's consumer surveys point the same way.

"About 57% spontaneously mentioned that their living standards have been eroded by high prices, the highest seen since May and up from 46% in February, just prior to the Iran conflict," survey director Joanne Hsu said in the latest release.

Where is the trade-down concentrated?

Not everywhere. The bank's data shows trading down is most prevalent in apparel and dining. Travel moves the other way — its spending tier metric has shifted upward.

Bowley said airline spending growth looks robust in card data, but mostly because fares rose while transactions dipped. The report noted "renewed strength in hotel spending growth as well as robust cruise spending — the latter often a budget-friendly way to travel." The institute reads the travel shift carefully: the increase may reflect lower-budget travelers forgoing trips entirely, not shoppers becoming less price conscious, given the decline in airline transaction growth over recent months.

Why are millennials hit hardest?

The report said millennials are trading down, likely due to the demands of early middle age. Many are parents paying for childcare on top of every other cost. Bowley said this generation also faces higher housing costs and auto payments.

Gen Z has consistently posted a lower composite score than older generations, which the report attributed to lower incomes and fewer accumulated assets. Baby boomers hold the highest composite, which has moved far apart from a dip during the pandemic.

"They do seem to have a pretty steady way of how they're going about shopping," Bowley said of the older cohort.

What are retailers seeing?

Recent earnings calls confirm the pattern. Scott McPherson, CEO of Performance Food Group, said "consumers remain value-conscious and selective with discretionary spending" and noted that gas prices around $4 on average are adding pressure to households. Ryan Grimsland, CEO of Advance Auto Parts, said hard parts categories remain soft as value-conscious consumers defer big repair projects.

Even wealthier shoppers are hunting deals. "Lower-income customers are prioritizing needs over wants, shopping closer to need, and in many cases delaying discretionary purchases where they can, while higher income customers continue to trade down in search of value," Eric van der Valk, CEO of Ollie's, said in the company's earnings call.

Can wage growth cushion the blow?

Bowley said the bank's data shows wage growth remains positive, which "kind of helps absorb some of the rise in prices." But she flagged a limit: "that can only go so far, especially when it comes to things like maybe housing."

With the Fed holding rates steady and inflation elevated, the value-tier shift looks set to shape retail earnings and pricing strategies into next year.