Consumers are challenging inflation to support the economy. How long?

WASHINGTON – If prices in the economy – from food, gas and rent to cars, airline tickets and hotel rooms – grow at the fastest pace in decades, one would think that Americans will stop spending.

Not so far. Consumers in general are showing remarkable resilience, not only maintaining their costs but also increasing them even after adjusting for inflation. In April, according to the government, retail trade was ahead of inflation for the fourth month in a row. It was a reassuring sign that consumers – America’s main drivers of the economy – continue to provide vital support and help allay concerns that a recession may be imminent.

However, at the same time, there are signs that some people, especially in low-income families, are starting to shrink by switching to more expensive or alternative goods or skipping some purchases altogether because inflation reduces their disposable income.

Last week, for example, Walmart, which caters to consumers who care about price, reported that most of them prefer lower-priced lunch in stores than more expensive national brands, and buy half-gallon boxes of milk instead of full gallons. Likewise, Kohl’s mid-priced department store said its customers spend less on each visit.

All of this highlighted the question that looms over the economy: how much time will consumers continue to spend at a healthy level – even if they grit their teeth – despite the pressure they are experiencing due to inflation around its 40-year high? The answer will be key to whether the country will be able to avoid a recession if the Federal Reserve moves toward a sharp rise in lending rates.

By most indicators, consumers have shrunk compared to last year’s spending, fueled by incentive checks and other government aid following a severe pandemic recession. This year, said Michel Mayer, chief economist at the MasterCard Institute for Economics, steady price increases have clouded Americans’ forecasts for the economy.

Despite that, Meyer said, there is some reason for optimism.

“There are still many reasons to believe in consumer sustainability,” she said, pointing to America’s robust job market and the solid wage growth that many people receive. “There is a certain frustration when they orient themselves in the environment in which we find ourselves. But they are still spending. “

Note that even though consumer sentiment, according to the University of Michigan, has fallen nearly 30% over the past year, Americans ’spending has surpassed inflation during that time. Michigan economists have noted that there is a “historical connection” between consumer sentiment and actual behavior.

Some economists warn that stable consumer spending is unlikely to continue amid aggressive Fed lending. And if consumer spending remains strong, the Fed may end up raising rates even more to cool the economy and slow inflation. Earlier this month, in a bid to curb inflation, the Fed raised the base rate by half a percent and signaled an additional big rate increase. Some fear that next year the economy could slide into recession.

However, several trends are stimulating Americans ’spending, including wage growth, savings accumulated during the pandemic, and a rebound in credit card usage. These savings and further wage increases, economists believe, could fuel healthy spending this year.

Consumers have shifted most of their spending from home appliances, electronics and simulators – types of goods that many spent at the start of the pandemic while at home – on travel, entertainment and other services. The intensity of this shift caught many retailers by surprise and contributed to some negative earnings reports.

Brian Cornell, CEO of Target, said the network “did not expect a sharp shift” in spending on TVs, home appliances and patio furniture for luggage, gift cards at restaurants and other items that reflect the growing desire of Americans to leave home and spend.

Southwest Airlines said growing demand for air travel will keep profits this year. Although average fares jumped 32% in the first quarter from a year earlier, the carrier said it saw no signs of declining demand.

For many people, the ability to travel after a two-year limit outweighs financial pressures as a result of rising prices.

Mike and Marsha Dislin, who live in San Jose, flew to Washington, D.C., last week to visit their daughter Sarah, a graduate student at Georgetown University.

“She went to school here for two years and we didn’t visit all the time because of COVID,” Marsha Dislin said. “Your priorities are changing.”

To save on gasoline, Mike Dislin said they drove the Toyota Prius more than the SUV, but otherwise did not make major changes to their spending habits.

Rising gas and food prices have forced other consumers to start retreating. The average national price of a gallon of gas jumped to $ 4.59, which is 50% more than a year earlier, according to AAA.

Walmart said buyers visit its gas stations more often, but fill less each time. And Kohl’s last week reported a drop in payment rates for its card stores after a year in which customers made significant payments. A higher level of card debt increases the risk of increased arrears.

Dan Goebel, a musician from Milbery, Massachusetts, cut his entertainment spending as spending soared far beyond what he earned. Goebel, a big band leader and trombonist, faces high prices not only for gas, but also for many things he needs to work – from a dry-cleaning band’s uniform to lubrication for instrument maintenance to the cost of paper and ink for printing scores.

To save money, the 33-year-old Gabel and his partner, an opera singer, quit HBO and Netflix. Although the music concerts have been stable, Gabel will now sit on the train if he can, rather than ride when performing outside the city.

“We feel the crunch,” Gabel said. “All these little things add up.”

However, at the national level, the overall sustainability of consumer spending illustrates a trend that may continue inflation: although people hate higher prices, they often continue to pay them when their wages also rise.

“Inflation doesn’t heal itself,” said Laura Weldkamp, ​​a professor of finance at Columbia University. “If commodity prices and wages rise together, it doesn’t necessarily reduce demand.”

According to the Federal Reserve Bank of Atlanta, the average economy across the economy in April rose by 6% over the previous year. This was the largest increase since 1990, although it was below the 8.3% inflation rate.

However, surprisingly most workers receive wage growth that exceeds inflation: about 45% did so in March compared to a year earlier, according to a study by Indeed Hiring Lab.

Nick Bunker and EnEzabeth Konkel, economists at Indeed, called “excellent” the fact that the figure was so high given inflation. This shows, according to them, how many employers are desperately looking for and retaining workers with an unemployment rate of just 3.6% and have published vacancies near a record high.

Many other consumers had to use their savings to continue spending. The level of national savings fell to about 6%, below the level before the pandemic, after reaching 16.6% in 2020 in 2020, the highest figure in records dating back to 1948, and 12.7% in 2021 year.

And as more Americans turn to credit cards for spending, household debt has risen 8.2% in the first three months of this year compared to a year earlier. This was the biggest growth since early 2008, when the economy was in recession.

However, economists say that the total debt has not yet reached the problem level. They estimated that households still have about $ 2 trillion in savings that exceed what they would have based on pandemic trends.

And Paul Ashworth, an economist at Capital Economics, notes that household debt is 86% of disposable income, well below the peak of 116% in 2008.

“Never bet against a U.S. consumer,” Ashworth said.