Weed and Inflation: Cannabis demand is nominally affected by a rise in US inflation



  • Inflation has only a nominal impact on retail cannabis demand
  • As states see a drop in demand, that drop is simply a return to pre-pandemic levels of consumption
  • Cannabis demand has remained steady and predictable during this period of heightened inflation
  • The data reflects this, both in pharmacy visits and in spend per transaction
  • This strong demand isn’t surprising, and is similar to the resilience of cannabis demand during a recession
  • The decline in cannabis sales in the US can be explained by two factors:
  1. A general return to the workplace
  2. Price deflation in cannabis products

Price inflation is at levels not seen since the 1980s

Inflation can be understood as a general increase in the price of goods and services. Inflation has been a hot topic of conversation, in the news, at meetings and conferences for most of the year. Inflation rates, currently at 8.5%, have been raised in discussions in the many national and state economic advisory groups I support. Much of this talk revolves around how the rise in inflation will affect aggregate demand in the market and how long the effects will be felt.

Inflation means reduced purchasing power, fewer jobs, less capital investment

One consequence of inflation is that consumers have less purchasing power. When consumers pay more for basic necessities like food, gas, or housing, they have less money to save or spend on other things like concert tickets, dinner, and general goods and services. When consumers cut back on spending, there is a ripple effect: the economy slows, fewer jobs are needed and there is less overall business investment.

Impact of inflation on consumer spending

The current post-Covid cycle is developing differently than other economic cycles. Transfer payments made by the federal government during the pandemic increased household wealth and preserved consumer spending power. While goods and services have been scarce during the pandemic, prices have risen, and even with these higher prices, consumers were still able and willing to pay. This cycle drove prices even higher, resulting in the highest inflation since the 1980s. Data now shows that consumers are starting to cut back on spending as they focus more on food, fuel and housing. Other industries are now being affected by this shift in consumer sentiment.

Inflation has a nominal impact on cannabis demand

Consumer demand for cannabis has been predictably resilient. One of the most common questions Whitney Economics has received lately has been whether or not inflation has impacted cannabis consumer demand. The answer to this question is no.

Cannabis revenue is falling — but not because of inflation

Cannabis sales are declining, but that’s not a result of inflation. The decline in cannabis demand is actually a function of two general factors:

• The return to work and school

• A general DEFLATIONAL environment for cannabis products

With fewer opportunities to consume cannabis throughout the day and falling prices for most cannabis products, sales in the US are declining. This is no surprise.

Return-to-work policies lead to a drop in cannabis demand

During the pandemic, cannabis demand surged: consumers could consume at home and at work. In some states like Oregon, cannabis demand grew 35% year over year in both 2020 and 2021. In a September 2021 article, Whitney Economic correctly forecast a return to pre-pandemic growth rates as a result of cannabis users returning to work, according to the bureau. That actually appears to be the case, as Colorado suffered its first year-over-year sales decline. Data suggests demand in Oregon is also faltering.

Source: Colorado Department of Treasury

Average basket sizes are returning to pre-pandemic levels.

Average revenue per transaction increased significantly during the pandemic. Cannabis users generally pooled money in their households and bought more per visit. This was not a phenomenon unique to cannabis. Starbucks and other retailers saw a similar pandemic buying pattern. Starbucks saw a significant increase in average transaction amounts in both 2020 and 2021. Now that there are fewer opportunities to use cannabis (Back to the Office), average baskets are lower and slightly higher than pre-pandemic amounts. This shows that despite higher rates of inflation, consumers are still spending on cannabis, but the consumer visits cannabis retailers less frequently and then spends less.

The chart below shows the cannabis industry’s favorite day of the year: April 20th. Here, Whitney Economics included data for that particular day for fun, but data on other dates shows a similar pattern of cannabis purchases returning to pre-pandemic levels.

Product price deflation also contributes to the decline in sales

Much of the drop in sales is related to changes in return-to-work policies, but another aspect of the drop in demand is due to deflation in product prices. In almost all product categories, prices have fallen by double digits over the course of 2021. These price declines have had a significant impact on overall sales. For example, cannabis flower market share accounts for up to 55% of cannabis revenue in the United States. The data shows this with a price reduction of 15%. Extrapolated, all other factors being equal, a 15% drop in flower prices would result in an 8.25% drop in overall U.S. sales. Most analysts attribute sales declines to inflation, but price deflation could actually have an even bigger impact on sales earnings. The impact of deflation on sales should not be overlooked.

Cannabis users are very disciplined with their budget

Cannabis users are very consistent in spending money on cannabis products. A large percentage of cannabis demand comes from a smaller group of high-frequency users. In addition, the demographics of the typical consumer show that these consumers have disposable income and are able to absorb price increases. As such, cannabis is fully ingrained in their lives and inflation is unlikely to impact these consumption patterns. While

Some part-time users can reduce spending on cannabis, but the impact on overall earnings is minimal. Therefore, cannabis demand is not significantly impacted by general US inflation. This idea is consistent with the study published by Whitney Economics on the impact of the pandemic on cannabis demand ( https://whitneyeconomics.com/report/cannabis-in-the-new-economy-how-cannabis-investment-could-grow like-a-herb-in-the-coming-recession-may-2020 )

Cannabis Demand Is Resilient: Inflation will not affect consumer demand

In summary, the decline in retail cannabis revenue is a function of return-to-work policies coupled with price deflation in cannabis product offerings. The effects of general price inflation hardly move demand. However, that doesn’t mean that headline inflation isn’t having an impact on the market.

In our next article, Whitney Economics will examine the impact that inflation is having on sales ramps in states with recent and upcoming cannabis legislation. This is where inflation is really having an impact, and could hurt the future growth of the cannabis industry.

Beau Whitney is the Founder and Chief Economist of Whitney Economics, a global leader in cannabis and hemp business consulting, data and economic research. Whitney Economics is based in Portland, Oregon.


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