This will impact credit growth and cost of borrowing. Third, if high inflation persists, monetary tightening may turn out to be more than expected. This differential will continue to widen if inflation remains high. Real net worth 3 of households in the United States grew 9.5% last year, slower than the 14.6% gain in nominal net worth. It’s not just income that inflation dents but also gains in real wealth, which, in turn, has the potential to weaken the positive “wealth effect” on consumer spending. 2 In March, 54% of respondents expressed concern about the amount of money they were saving this share has been rising since June 2021 (figure 5). Deloitte’s survey of consumers reveals that as COVID-19 infection cases recede, concerns about personal finances are rising. No wonder then, that, consumers appear worried about their finances despite strong job growth. Since January 2021, as inflation has gone up, real average weekly earnings have fallen 4.5%, even while nominal earnings rose 4.8% in this period. While nominal earnings continue to rise due to labor market tightening, real earnings have been on a broad downward trend since last year (figure 4). While strong job creation and declining unemployment have aided income growth, and hence spending, rising inflation can dent consumers’ momentum through three key effects.įirst, inflation has affected growth in real income, thereby curtailing consumers’ purchasing power. High inflation and improving labor market conditions are opposing forces influencing real consumer spending. Rising inflation poses risks for real consumer spending Its sub-index of consumer expectations has been trending down since last year because of concerns about future inflation, contrary to the sub-index of confidence in the current situation, which remained elevated during this period (figure 3). It’s worth noting that the CCI does include a section on the impact of inflation. While unemployment is now low at 3.6%, the employment-to-population ratio is closing in on prepandemic levels. The labor market has been steadily improving since the deep shock in the first half of 2020 when the pandemic first hit US shores. That is a key reason behind the higher numbers for the CCI compared to the ICS. Worries about inflation-as is overwhelmingly evident in the ICS data-do not find their way as much into the CCI, which puts greater emphasis on the labor market. Core personal consumption expenditures (PCE) inflation, a gauge for prices that is tracked closely by the United States Federal Reserve (Fed), was at 5.4% in February and has been above the Fed’s target of 2% since April 2021 (figure 2). That’s not surprising given that headline inflation went up to 8.6% in March, the highest since the early 1980s. In the survey, expectations about inflation a year from now have edged up steadily since last year, to 5.4% in March. The ICS fell to 59.4 in March-the lowest reading in more than 10 years-with inflation dominating people’s worries about personal finances and economic growth. Inflation also hurts low-income households more than others, thereby widening income inequality. Worse, any higher-than-expected rise in inflation may force a stronger dose of monetary tightening, further weakening the impetus for consumers to spend. It often forces households-especially low- and medium-income ones-to pull back on discretionary spending. Rising inflation weighs on consumers’ purchasing power by slowing or even reversing gains in real wages and wealth. This leads to a more important question: Does high inflation threaten growth in real consumer spending? The answer is yes. The gap between the two measures is mostly due to inflation and its greater role in the ICS than in the CCI. Does that mean we don’t really know the pulse of US consumers? Thankfully, that’s not the case. That’s unprecedented as the two measures have never given such different signals. As figure 1 shows, the University of Michigan’s Index of Consumer Sentiment Index (ICS) has been trending much lower than the Conference Board’s Consumer Confidence Index (CCI) since early 2021. So, it’s worrying to see different moods in two key measures of consumer sentiment. 1 Sustaining this recovery in the medium term, therefore, depends much on their ability and willingness to raise their purchase volumes. Consumers have been at the forefront of the postpandemic recovery, with real consumer spending growing by 12.1% in 2021.
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