Consumer spending defying inflation
Soaring prices not stopping Americans, but for how long?
WASHINGTON – With prices across the economy – from food, gas and rent to cars, airfares and hotel rooms – soaring at their fastest pace in decades, you might think Americans would tap the brakes on spending.
Not so far. Consumers as a whole are showing surprising resilience, not only sustaining their spending but increasing it even after adjusting for inflation. In April, the government said, retail sales outpaced inflation for a fourth straight month. It was a reassuring sign that consumers – the primary drivers of America’s economy – are still providing vital support and helping allay concerns that a recession might be near.
Yet at the same time, there are signs that some people, especially in lowerincome households, are starting to cut back, by shifting to lower-priced or alternative items or by skipping some purchases altogether as inflation shrinks their disposable income.
Recently, Walmart, which caters to price-conscious consumers, reported more of them were favoring lower-cost store brands of lunch meat over pricier national brands and buying half-gallon cartons of milk rather than full gallons. Likewise, Kohl’s, a mid-priced department store, said its customers were spending less on each visit.
All of which has put the spotlight on a question floating over the economy: How long will consumers as a whole continue to spend at healthy levels – even if through gritted teeth – despite the pressures they’re feeling from inflation near 40-year highs? The answer will be key to whether the nation can avoid a recession as the Federal Reserve moves to sharply raise borrowing rates.
By most measures, consumers have downshifted from last year’s blowout spending, which was fueled by stimulus checks and other government aid after the brutal pandemic recession. This year, noted Michelle Meyer, chief U.S. economist at the MasterCard Economics Institute, steadily surging prices have dimmed Americans’ outlook for the economy.
Even so, Meyer said, there is some cause for optimism.
“There’s still plenty of reasons to believe in the resilience of the consumer,” she said, pointing to America’s robust job market and the solid pay increases many people are receiving. “There is a certain amount of frustration as they navigate the environment we’re in. But they’re still spending.”
Consider that even while consumer sentiment as measured by the University of Michigan plunged nearly 30% over the past year, Americans’ spending outran inflation during that time. Economists at Michigan noted that there has been a “historic disconnect” between
sentiment and actual behavior.
Some economists warn that steady consumer spending won’t likely last in the face of the Fed’s aggressive credit tightening. And if consumer spending does stay strong, the Fed might have to jack up rates further to cool the economy and slow inflation. This month, in its quest to quell inflation, the Fed raised its benchmark rate by a half-percentage point and signaled additional large rate hikes to come. Some fear the economy could slide into recession next year.
Still, several trends are driving Americans’ spending, including rising pay, savings amassed during the pandemic and a rebound in credit card use. Those savings and continued wage gains, economists said, could fuel healthy spending throughout this year.
Consumers have been shifting much of their spending away from appliances, electronics and exercise equipment – the kinds of goods many splurged on early in the pandemic while hunkered down at home – to travel, entertainment and other services. The intensity of that shift has caught many retailers off guard and contributed to some negative earnings reports.
Soaring gas and food prices have led other consumers, though, to start pulling back. The national average cost of a gallon of gas has jumped to $4.59, up a painful 50%-plus from a year earlier, according to AAA.
Walmart has said its shoppers are visiting its gas stations more frequently but filling up less each time. And Kohl’s last week reported a drop in the payment rate for its store cards after a year in which customers made sizable payments. Higher levels of card debt raise the risk of increased delinquencies.
Dan Gabel, a musician in Millbury, Massachusetts, has pared his entertainment spending as costs have soared far beyond what he earns. Gabel, a bigband leader and trombonist, is facing soaring prices not just for gas but also for many items he needs for work – from dry clearing band uniforms to lubricant for maintaining instruments to the cost of paper and ink to print music scores.
To save money, Gabel, 33, and his partner, an opera singer, have dropped HBO and Netflix. Although the music gigs have been steady, Gabel now takes the train, if he can, rather than drive when he performs out of town.
“We’re feeling the crunch,” Gabel said. “It’s all these little things that do add up.”