Americans continue to spend even as inflation erodes purchasing power

Americans have racked up billions of dollars in savings during the pandemic. Now, as prices rise at their fastest pace in decades, they...


Americans have racked up billions of dollars in savings during the pandemic. Now, as prices rise at their fastest pace in decades, they’re tapping into that stock to keep spending.

Consumer spending rose 0.9% in April, Commerce Department says said friday, as Americans shrug off high prices to buy tickets for flights, sporting events and other experiences they had to forego earlier in the pandemic. Auto sales also rose as car buyers purchased vehicles after months of shortages.

Incomes are also rising, the result of a robust labor market and the fastest wage growth in decades. But income is not keeping up with spending or rising prices: after-tax income rose 0.3% in April from the previous month and remained flat after controlling for inflation.

As a result, Americans are fueling their spending by saving less. Households saved just 4.4% of their after-tax income last month, the lowest savings rate since 2008.

Record levels of government assistance during the pandemic, combined with reduced spending on many leisure activities, have allowed Americans to build up a substantial reserve of additional savings — $2.5 trillion or more by some estimates. This cushion could allow consumers to continue spending even if prices rise. A instantaneous of the Financial Health of Americans conducted last fall and released by the Federal Reserve this week found that 78% of respondents felt they were “doing at least well” – the highest rate in the Federal Reserve’s nine-year history. ‘investigation.

But relying on savings is unsustainable in the long run. Economists say many low-income households are likely to have exhausted their savings already, or will in the coming months, especially as high gasoline and food prices continue to take their toll. Balances on credit cards and similar types of debt rose at an annual rate of 35.3% in March, the largest one-month increase since 1998, according to Federal Reserve data.

“If you’re relying on the credit card to fund your expenses, by definition that’s not sustainable,” said Tim Quinlan, senior economist at Wells Fargo. Consumer spending held up better than expected by most forecasters, he said, but is expected to slow in coming months.

Consumers are unlikely to be relieved by rising prices anytime soon. Inflation eased slightly in April, but remained close to its highest level in four decades.

Consumer prices rose 0.2% last month from March and 6.3% from a year earlier, according to the Commerce Department report. That was down from a 6.6% annual increase in March, which represented the fastest rate of inflation since 1982.

Economists and investors are keeping a close eye on the report’s personal consumption expenditure price index, an alternative to the more well-known consumer price index, as the Federal Reserve prefers it as a measure of inflation. The central bank raised interest rates and announced that it would begin to reduce its assets in an effort to cool the economy and bring inflation under control.

In a statement released by the White House On Friday, President Biden called falling inflation a “sign of progress, although we still have work to do.”

The slowdown in inflation in April was largely the result of lower prices for gasoline and other energy. Gas prices soared in February and March largely due to Russia’s invasion of Ukraine, then moderated somewhat in April. They have resurrected in recent weeks, however, which could push up inflation measures in May. Food prices have also risen rapidly in recent months, a trend that continued in April.

Excluding the volatile food and fuel categories, consumer prices rose 4.9% in April from a year earlier. This basic measure, which some economists consider a more reliable guide to the underlying inflation rate, rose 0.3% from the previous month, little changed from the rate of increase in March.

The relatively weak increase in core prices in the data released on Friday contrasts with the strong acceleration to the equivalent extent in the Consumer Price Index report released by the Department of Labor this month. The divergence was primarily the result of differences in how the two measures account for airfares, however, and economists said the Fed is unlikely to be very reassured by the Commerce Department data.

“I suspect they’ll probably weather the downturn,” said Omair Sharif, the founder of research firm Inflation Insights. He noted that the core index also slowed in the fall, only to recover at the end of the year, catching the Fed off guard.

Many forecasters believe that the headline inflation rate peaked in March and April marked the start of a gradual slowdown. But the recent rebound in gasoline prices threatens to complicate this picture. And even though inflation continues to ebb, prices are still rising much faster than the Fed’s 2% target over time.

The public, Mr Quinlan said, is unlikely to see the slight moderation in inflation as much to celebrate.

“For them, year-over-year price growth doesn’t matter,” he said. “That’s, why does a crap lunch cost $12 now?” »

Inflation weighed on consumer confidence, which fell 10.4% in May to its lowest level in more than a decade, according to a long-running University of Michigan survey. So far, however, this pessimism has not translated into reduced spending.

“At least in the second quarter, consumers really had their wallets wide open,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “We think that eventually it will have limits. Right now we all feel pent up and just need to travel. But next year is a different story.

More expenses were go to experiences such as hotel stays, concerts and haircuts in recent months as people have become more comfortable in crowded spaces. Commodity prices were climb faster than the cost of services, in part due to ongoing supply chain issues and the war in Ukraine. Adjusted for inflation, spending on goods rose 1% during the month, while spending on services rose 0.5%.

This dynamic has rocked big-box stores like walmart and Target, who found themselves unable to pass on the higher costs to buyers. Stocks at discount retailers like dollar treein contrast, jumped on Thursday as they announced sales increases and raised their profit forecast.

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Newsrust - US Top News: Americans continue to spend even as inflation erodes purchasing power
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