American consumers have shifted spending toward value retailers at the highest rate since 2021, according to a Bank of America Institute report that tracks trading down across apparel, dining, grocery and travel. The shift is most pronounced among millennials, whose household budgets face childcare costs, elevated housing payments and higher auto financing obligations.

"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 did the bank measure the shift?

The Bank of America Institute built a spending tier composite (an index comparing where consumers shop across price tiers) using consumer spending data across four categories: apparel, dining, grocery and travel. The composite draws on the median incomes of shoppers at premium, standard and value stores to track changes in spending behavior.

The composite has trended downward over the past several years, and the report concluded that "more households are shifting spending to value tier merchants" rather than high-end establishments and experiences. The current level reflects the most consumer trading down since 2021.

What is driving consumers toward value?

Affordability pressures have intensified across several fronts. 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 households.

The Federal Reserve hiked interest rates in September to combat stubborn inflation but held rates steady in October while policymakers seek more data.

The University of Michigan's consumer surveys reflect the same strain. "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.

Which categories show the sharpest trading down?

The bank's data showed trading down is most prevalent in apparel and dining. Travel has moved in the opposite direction, posting an upward shift in the spending tier metric.

The travel figure carries a caveat. Bowley said card data shows airline spending growth has been robust, but largely because of higher fares as transaction volumes dip.

"There has recently been renewed strength in hotel spending growth as well as robust cruise spending — the latter often a budget-friendly way to travel," the report said. "Still, the increase in Bank of America's travel STC may reflect lower-budget travelers forgoing trips rather than becoming less price conscious given the decline in airline transactions growth in the past several months."

Why are millennials trading down most?

The report attributed millennial trading down to the financial demands of early middle age. Many millennials are parents paying for childcare on top of other household costs. Bowley said this generation has also faced higher housing costs and auto payments than earlier cohorts at the same stage.

Generation patterns diverge sharply across the composite:

• Gen Z has consistently recorded a lower composite score than older generations, which the report said likely reflects lower incomes and fewer accumulated assets among these consumers.
• Baby boomers posted the highest composite, which has moved far apart from a dip during the pandemic.
• Millennials show the most active downward migration between tiers.

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

What are retailers seeing?

Recent earnings calls confirm the value-seeking behavior visible in the bank's card data. Scott McPherson, CEO of Performance Food Group, said that "consumers remain value-conscious and selective with discretionary spending." He added that gas prices around $4 on average are adding pressure to households.

Ryan Grimsland, CEO at Advance Auto Parts, said in his company's earnings call that hard parts categories remain soft as value-conscious consumers defer big repair projects.

The trade-down dynamic now extends across income levels. "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.

Does wage growth offset the pressure?

Bowley said the bank's data shows wage growth remains positive, which absorbs part of the price increases. The offset has limits, she cautioned, particularly for large fixed costs.

"That kind of helps absorb some of the rise in prices, but that can only go so far, especially when it comes to things like maybe housing," Bowley said.

The report's central finding stands: consumers continue to spend, but they are redirecting those dollars toward value-tier merchants at a rate unmatched in four years, with millennials leading the shift and even higher-income households hunting for deals.