Americans’ income and spending haven’t kept up with rising prices in May, the latest sign that the fastest inflation of their generation is eroding the foundations of an economic recovery.
Personal consumptionAccording to the Commerce Department, it fell for the first time this year after inflation adjustments, down 0.4% from April. In addition, according to the government, spending in the first four months of the year increased more slowly than previously reported, and inflation-adjusted after-tax income fell slightly.
The report provided new evidence that the US economy remains in a delicate balance as the Federal Reserve seeks to curb inflation. Policy makers want to cool consumer demand for goods and services that are outpacing supply and pushing up prices. However, if the central bank aggressively curbs demand when prices are already squeezing consumption, it can cause a recession.
Consumers have hardly stopped spending. Overall demand remains strong, especially for vacation trips, restaurant meals, and other services that many families avoided in the early days of the pandemic.
Still, several forecasters said Thursday they believed in inflation-adjusted US gross domestic product. It shrank in the second quarter. This is the second consecutive decline, an informal but general definition of a recession.Most economists say the United States is not in recession yet A more formal definitionThis takes into account various economic indicators, but they say the risk is increasing.
Data released Thursday suggested a potential easing of inflation. The consumer spending index, which the Federal Reserve has officially targeted when aiming for an average of 2% inflation over the long term, rose 6.3% year-on-year in line with the rise in April. Due to the rise in gas prices, it rose 0.6% from a month ago and rose rapidly.
However, the core price index, which excludes volatile food and fuel prices, has risen 4.7% over the past year, down slightly from previous measurements of 4.9%. Its core index has risen 0.3% since April, almost in line with the past few months.
Ian Shepherdson, chief economist at Pantheon Macroenomics, said policymakers “perhaps sit quietly and feel a little relieved” that the rise in core prices has eased. However, inflation is still very high, its outlook depends on variables like the Ukrainian War, and it is unlikely that the latest data will divert the Fed.
“It’s not time to even declare potential victory hints,” Shepherdson said.
Inflation is damaging consumer finances and their economic outlook. According to a New York Times survey conducted by an online survey platform on June 13-19, 52% of adults in the United States say they are financially worse than they were a year ago. Momentive.. 92% say they are concerned about inflation, and 70% say they are “very concerned”.
Until recently, there were few signs that consumers’ moody moods had a significant impact on their spending. But that may be starting to change. Unadjusted consumer spending rose 0.2% in May, the weakest rise this year, and spending on the fastest-growing goods declined.
In other regions, consumers are spending more, but less. For example, in May households bought about the same amount of gasoline as in April, but paid 4% more.
Tim Trulu put $ 35 worth of gas into the truck last Friday and emptied again after visiting his parents 30 miles away on the weekend. So he is looking for other places to reduce. Traveling to grocery stores has become a tedious routine: bread, cheese, eggs, milk, whatever lunch meat is on sale. Mr Trulu said he was no longer walking down the flesh corridor.
“I like raisin bran, but I can’t even buy raisin bran,” he said. “Currently, raisin blanc costs about $ 7 a box.”
51-year-old Trull received a 50 cents hourly salary increase on Christmas, but inflation has wiped it out, especially as furniture factories in Hickory, North Carolina have begun to reduce overtime. Now, in the recession, he is worried about losing his job.
“I have some bad feelings that it will eventually decline and they will start dismissing people again,” he said. “Who buys furniture when deciding on gas, food and new loveseats?”
A story like Mr. Trulu highlights the risks the economy faces if the job market slows down. Despite the May drop, Americans’ incomes as a whole have almost caught up with inflation, thanks to rising wages and strong employment growth.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So tomorrow the dollar won’t fall as much as it does today. This is usually expressed as an annual change in the prices of daily necessities and services such as food, furniture, apparel, transportation and toys.
However, the job market could cool in the coming months as the Fed raises interest rates to curb inflation. Weak wage growth, slow job acquisition, or worse, complete unemployment can slow income growth and make people more reluctant to immerse themselves in savings. It can increase the likelihood of a recession.
“I think the story really started to change if employment growth began to slow, wage growth began to slow, and unemployed claims began to increase,” said Michelle Meyer. Chief US Economist at the Mastercard Economics Institute.
US households have also accumulated trillions of dollars in savings during the pandemic, with government support. These savings, at least in theory, could help consumers continue to spend, even if their income lags further behind inflation. Households are already reducing their savings to keep up their spending. Americans saved 5.4% of their May after-tax income. This has increased slightly since April, but is below about 7% of the pre-pandemic years.
But if worried about the possibility of a recession, families may be reluctant to dig deeper into funding on rainy days, said Pablo Villanueva, senior US economist at UBS.
“In recent months, consumers have begun to rely on lower savings rates to finance their consumption, which can last very long, especially in situations where consumer confidence is very weak,” he said. rice field.
