Americans have accumulated trillions of dollars in savings during the pandemic. With prices rising at the fastest pace in decades, they are drawing on that stock to keep spending.
Consumer spending rose 0.9 percent in April, the Commerce Department said Friday, as Americans shrugged off high prices to buy tickets for flights, sporting events and other experiences they had missed earlier in the pandemic. Car sales also rose as car buyers bought cars after months of shortages.
Incomes are also rising as a result of a robust labor market and the fastest wage growth in decades. But incomes are not keeping pace with spending or rising prices: after-tax incomes rose 0.3 percent in April from the previous month and remained flat after adjusting for inflation.
As a result, Americans fuel their spending by saving less. Households set aside just 4.4 percent of their after-tax income last month, the lowest savings rate since 2008.
Record levels of government aid during the pandemic, coupled with reduced spending on many leisure activities, have allowed Americans to build up a significant reserve of additional savings — $2.5 trillion or more by some estimates. That cushion could allow consumers to continue spending even as prices rise. A snapshot of Americans’ financial health taken last fall and released this week by the Federal Reserve showed that 78 percent of respondents felt they were “at least doing well” — the highest percentage in nine-year history. of the research.
But relying on savings is unsustainable in the long run. Economists say many lower-income households have probably already used up their savings, or will do so in the coming months, especially as high gas and food prices continue to take their toll. Credit card balances and similar debt rose 35.3 percent year-on-year in March, the largest single-month increase since 1998, according to data from the Federal Reserve.
“Depending on the credit card to fund your expenses is inherently unsustainable,” said Tim Quinlan, senior economist at Wells Fargo. Consumer spending has held up better than most forecasters had expected, but is likely to decline in the coming months.
Consumers are unlikely to get much relief from rising prices anytime soon. Inflation cooled slightly in April but remained close to a four-decade high.
Consumer prices rose 0.2 percent from March last month and were 6.3 percent higher than a year earlier, the Commerce Department report found. That was less than a 6.6 percent annual increase in March, the highest inflation rate since 1982.
Economists and investors are closely monitoring the report’s consumer spending price index, an alternative to the better-known consumer price index, as the Federal Reserve prefers it as a measure of inflation. The central bank has raised interest rates and announced that it will phase out its assets to cool the economy and curb inflation.
In a statement released Friday by the White House, President Biden called the inflation dip “a sign of progress, even though we have more work to do.”
The inflation slowdown in April was largely due to a decline in the price of gasoline and other energy. Gas prices rose in February and March, largely as a result of the Russian invasion of Ukraine, before moderating somewhat in April. However, they have risen again in recent weeks, which could push inflation measures back up in May. Food prices have also risen rapidly in recent months, a pattern that continued into April.
By eliminating volatile food and fuel categories, consumer prices rose 4.9 percent in April from a year earlier. That core measure, which some economists consider to be a more reliable guide to the underlying inflation rate, was 0.3 percent higher than a month earlier, little change from the pace of growth in March.
The relatively tame rise in core prices in the data released Friday contrasted with the sharp acceleration in the equivalent measure in the Consumer Price Index report released this month by the Labor Department. However, the divergence was mainly the result of differences in how the two measures count air fares, and economists said the Fed was unlikely to take much comfort in the Commerce Department’s data.
“My suspicion is that they will probably see through the delay,” said Omair Sharif, the founder of the research firm Inflation Insights. He noted that the core index also slowed in the fall, only to pick up again at the end of the year, overtaking the Fed.
Many forecasters believe that headline inflation peaked in March and that April marked the beginning of a gradual cooling. But the recent rebound in gas prices threatens to complicate that picture. And even if inflation continues to decline, prices will still rise much faster than the Fed’s target of 2 percent over time.
The public, Mr Quinlan said, is unlikely to view the slight moderation in inflation as a celebration.
“For them, year-on-year price growth doesn’t matter,” he said. “It’s, why does a crappy lunch cost $12 now?”
Inflation has taken its toll on consumer confidence, which fell 10.4 percent in May to its lowest level in more than a decade, according to a long-term study from the University of Michigan. So far, however, that pessimism has not translated into less spending.
“At least in the second quarter, consumers really had their wallets wide open,” said Kathy Bostjancic, the chief US economist at Oxford Economics. “We think that eventually that will have limits. At this point, we all feel refreshed and just need to travel. But come next year, it’s a different story.”
In recent months, more spending has gone into experiences like hotel stays, concerts and haircuts as people feel more comfortable in crowded spaces. Prices for goods have risen faster than the cost of services, partly due to lingering supply chains and the war in Ukraine. Adjusted for inflation, spending on goods rose 1 percent during the month, while spending on services rose 0.5 percent.
That dynamic has rocked major stores like Walmart and Target, which have been unable to pass on higher costs to shoppers. Shares of discount stores like Dollar Tree, on the other hand, rose Thursday as they reported sales gains and raised their earnings forecasts.
