Holiday shopping season expected to be muted amid high inflation

Retailers are scrambling to prepare for the fast-approaching holiday shopping season, but sales growth is expected to be muted this year as consumers cope with tightening budgets.

A spate of reports say shoppers are likely feeling thrifty as they face higher prices for groceries and other necessities. The consumer price index has climbed 8.3% over the past year, according to Tuesday’s Bureau of Labor Statistics report. As a result, holiday sales growth is expected to be driven largely by inflation.

Already, retailers have relied heavily on discounts to move excess inventory and clear shelves in time for the holiday shopping season, which typically kicks off with Black Friday after Thanksgiving. It’s a critical time for retailers and can account for upwards of 40% of a company’s annual sales.

Here’s what forecasts say shoppers and retailers can expect.

On paper, this holiday season’s sales may appear healthy, with Bain & Co. forecasting growth of as much as 7.5% from last year. But when adjusted for inflation, it expects growth of just 1% to 3%, which is below its 10-year average. 

The modest forecast follows the 14.1% jump for last year’s holiday season, according to the National Retail Federation. That increase was chalked up to shoppers being eager to spend their savings as pandemic restrictions eased, even as supply chain bottlenecks slowed deliveries.

Now, consumers and retailers alike are facing a bleaker reality. A poll commissioned for CNBC by Morning Consult showed more than half of consumers are either somewhat or very concerned about staying within their holiday-spending budgets, and 80% expect to be affected by inflation.

The poll also found 52% of respondents said it will be harder to afford their holiday expenses this year than in 2021.

“It’s for sure a year in transition,” said Matt Kramer, KPMG’s national sector leader for consumer and retail.

With consumers being cautious about spending this year, he said retailers will need to push discounts.

Retailers are expected to continue leaning on promotions, a lever they’ve grown familiar with while struggling to adjust to changing shopping habits in recent months.

As pandemic restrictions eased and people started going out more, many companies found they had stocked up too much on items people didn’t want anymore. That forced them to heavily discount products to clear shelves and make room for the holidays.

In August, Target reported a steep drop in earnings and slashed financial outlooks following steep markdowns. Walmart in July opted out of competing with Prime Day after it was forced to significantly slash prices to move its own inventory.

The discounting is expected to continue into the holiday season, with 73% of retail executives telling…