Holiday shopping is expected to grow, boosted by inflation

Despite macroeconomic pressures and a cautious consumer, retail sales this holiday season are expected to grow year-over-year as spending remains strong.

According to Bain & Company’s annual forecast, holiday retail sales are expected to top $1 trillion for the first time, marking a 4.5% growth. That growth is largely projected to be from in-store sales at 70%, though e-commerce is continuing to gain share.

The holiday spending is supported by higher tax refunds, which are up $43 billion this year, or 17% year over year, adding more cash to consumers’ wallets. Even still, the report noted that Bank of America estimates half of that benefit has already gone to higher gas prices, which have significantly squeezed budgets.

Bain also noted that the headline spending increase is underscored by rising inflation, which accounts for most of the growth, making actual unit growth thinner than it appears. Categories that are most affected by inflation with unit decline include food and beverage, furniture, and health and personal care.

Wednesday’s personal consumption expenditures report, the Federal Reserve‘s primary inflation gauge, saw consumer prices post a smaller than expected increase from last year, putting the 12-month gain at 3.4%. Economists had been looking for an increase of 3.7%.

The spending forecast comes as the Conference Board reported Tuesday that consumer confidence fell to its lowest level since 2014 in September. Respondents said they were worried about inflation and the jobs outlook.

Still, Deloitte forecast a similar projection to Bain, saying it expects holiday retail sales to reach $1.7 trillion this year. It noted that consumers are going to get more creative about how they’re spending their money, including looking for discounts and markdowns.

“As they look to get more out of their dollars, we continue to see value-seeking behaviors across income levels, including switching among brands and retailers and using promotions to manage spending,” said Natalie Martini, vice chair of Deloitte and U.S. retail and consumer products leader. “These behaviors are expected to shape how consumers approach holiday shopping this season.”

That’s a trend echoed by Adobe‘s holiday shopping report, which expects value-first shopping to power growth and share this year. The company also said it expects buy now, pay later spending to hit a record of $21.3 billion as consumers become more intentional with how they’re spending their money.

In another sign of changing habits, consumers have smaller baskets when they’re checking out, but they’re making more frequent trips, especially when it comes to grocery shopping, according to AlixPartners’ holiday projections report. They’re also shifting from premium to private-label brands and buying fewer, higher-quality items.

“Consumers are not cutting back evenly across every category,” Sonia Lapinsky, leader of fashion retail at AlixPartners, said. “They are becoming more selective about self-gifting and looking…