Some are optimistic that companies may eat the costs of inflation for a while. Is it reasonable or even feasible that companies would not pass these expenses onto their consumers through price increases?

ST: In the long term? I don’t think it’s at all practical — especially if we’re dealing with stakeholders. They’re not going to say, “Yeah, that’s fine. We’ll deal with a decrease because of the tariffs.” That’s not going to happen.

In the short term, companies could gamble on the idea that it will bring in enough business because of the goodwill it creates. That’s not practical for public companies, but for private companies, it is possible that they’ll try to take a stand and say that they don’t want it to affect the customers. In the long term, they also need to pay their bills, they also need to pay their workers. The money has to come from somewhere, and I don’t think it’s realistic to expect that companies are just going to eat this themselves.

What would you say is the biggest misconception around inflation and consumers?

ST: The biggest misconception is that it’s talked about on a monthly basis or a yearly basis: “We’re up from last month, we’re down from last month, we’re up from last year, we’re down from last year.” In reality, consumers don’t update in that same fashion. They don’t think, “Oh, egg prices are only up 2% from last year.” They have a much longer memory for what things should cost.

It’s that old story where your grandfather tells you about how milk used to cost 25 cents. You have these prices that get stuck in your head that you’ve had for years and years. In periods of inflation, we as consumers don’t update on a regular basis even if it goes down. Even if prices were to go down a little bit, it doesn’t feel cheap to us because we haven’t gotten used to the increase in the first place. It’ll still feel expensive no matter how long it stabilizes for or if it goes up and down in short periods. We’re just going to focus on the fact that it all feels expensive to us.

From your perspective, what are the key traits of financial resilience?

ST: There are two pieces to that. One is there are some consumers who create buffers for themselves so they have more liquid assets. If you have money tied up in a house, it’s really hard to use that. But if you have money tied up in the stocks or in a certificate of deposit or a savings account, it is much easier to get that money when times get difficult. So the consumers who have more of that available to them are going to be more financially resilient when things get difficult.

The other part is adapting, and that’s hard in the short term. To cut back on spending feels aversive to us. We don’t like to do that. There’s research showing we’d much rather make more money than cut back on things. You might see Uber drivers driving more often or you might see people trying to take on small gig work more often as a function of this. But I think resilient consumers will recognize the importance of cutting back or changing their spending habits as well. The good thing is that if we can get into new habits, cutting back is really short-term pain because humans are actually really adaptable.

We get on this “hedonic treadmill.” Things are aversive at first, and then we get used to it. Or, things are great at first and then we get used to it, and it’s just daily life. The consumers who are resilient are the ones who can stomach changing those fixed expenses, lowering those costs, and getting a cheaper car when their lease is up.