Back in July, a ChangeWave survey of 4,525 consumers pointed to yet another clear downturn in U.S. consumer spending—despite the injection of $150 billion in tax rebates to stimulate the economy.

In that July survey, we focused on the key reasons why consumers are spending less. As the following chart shows, the chief culprits are Inflation (56%; up 4-pts) and Higher Energy Costs (56%; up 7-pts).

These twin factors have skyrocketed since January in terms of their overall negative impact on consumer spending. Meanwhile, other consumer behaviors like Reducing Debt (24%), Saving More Money (18%) and Investing More Money (8%) have declined.

But Wait…There’s More to the Story!

Here at ChangeWave, we’ve taken a close-up look at the impact of inflation and higher energy costs on consumers.

First, in our July survey, we asked respondents to tell us what effect—if any—higher energy prices will be having on their discretionary spending over the next 90 days. And while 15% of respondents said rising energy costs were having a Significant Effect on their spending, an unprecedented three-in-five (60%) said they were having a Modest Effect (see also, “Energy Costs Gobble Up Discretionary Dollars“)

All told, that’s 8 points higher than in our previous survey of just two months earlier!

In another related question, 12% of respondents said their driving had been “Very Much” affected by the rise in gasoline prices—a three fold increase since the beginning of the year. But it’s not just driving habits that have been altered by the rise in inflation. When we asked consumers if rising prices in general had caused them to make other changes to their normal spending routine, one-in-two (50%) said yes. And among that group, an extraordinary 68% said the number one change they’ve made is to Eat Out Less.

Note that 52% also reported they’re Shopping More at Discount Stores, and 41% said they’re Buying Lower Cost Items.

At ChangeWave Investing, one of the stocks recently added to the portfolio is…> Fred’s Inc. (FRED)—a regional discount store that’s been reaping the benefits from this transformation in consumer behavior. In just a few months, subscribers have made 31% profits and there’s more to come.  Plus, there are two other retail stocks on the Buy List which are set for big gains as well! ( Follow this link to sign up for your 90 day risk-free trial subscription, and find out the names of these other winners!)

The Substitution Principle

Now, here’s perhaps the most interesting transformation of all—the “substitution principle”—which includes everything from shoppers replacing their steaks with hamburgers, to buying off-the-rack clothes rather than designer labels.

For example, respondent JLE0128 reports he is replacing expensive food items with less costly ones. “I’ve quit eating steak, lobster, and expensive Tex-Mex,” he writes. “I’m searching out all low cost options—eating hamburgers, not ordering drinks or other costly extras with meals. I’m also sticking with basic needs and avoiding anything not reasonably priced. No more Starbucks—I now use McDonald’s for coffee."

Member GAM91914 adds, “More pasta and rice dishes are being eaten, with less dairy and meat.” Respondent PEN02292 says he’s "replaced organics at Whole Foods for generics at Ralph’s” and RIC00696 is “buying more store branded foods rather than national brands like Proctor & Gamble, Kraft and ConAgra.”

DOM95250 says, “I now make peanut butter & jelly sandwiches to take to work instead of going out."

As U.S. consumers continue to make substitutions to compensate for the drag of inflation and higher energy costs, both winners and losers are emerging.

How to Profit Today

For example, although virtually all restaurants have taken a hit because of slower spending during 2008, it’s the weaker chains have really taken it on the chin—the latest examples being Bennigan’s and Steak & Ale, which just filed for bankruptcy.

Other recent examples of stores losing market share due to consumer behavior changes include Best Buy (BBY; 9%) and the whole gamut of Mall giants such as Macy’s (M; 8%) and Sears (SHLD; 5%).

At the same time, we are witnessing a large-scale migration to discount stores and wholesale clubs—with Wal-Mart (WMT; 25%) and Costco (COST; 16%) among the biggest beneficiaries.

Talk about substitution!

Back in March, we first reported on a seismic transformation in retail shopping led by sharply lower spending and higher inflation. That huge shift by consumers to the discount retailers and wholesale clubs now appears to have solidified into a permanent, long-term, secular trend.

One easy way to turn the Alliance survey results into profits is by joining ChangeWave Investing! Toby Smith provides everything you need—including which stocks to buy, at what price and when it’s time to take profits. But don’t wait, sign up today for your 90 day risk-free trial subscription by clicking here now!

Also in this issue: