Income and Spending Lag Behind Inflation, a Sign of Economic Fragility
Americans’ income and spending failed to keep pace with rising prices in May, the latest sign that the fastest inflation in a generation is chipping away at the bedrock of the economic recovery.
Consumer spending, adjusted for inflation, fell for the first time this year, declining 0.4 percent from April, the Commerce Department said Thursday. In addition, spending rose more slowly in the first four months of the year than previously reported, the government said, and after-tax income, adjusted for inflation, fell slightly.
The report offered new evidence that the U.S. economy hangs in a delicate balance as the Federal Reserve tries to bring inflation under control. Policymakers want to cool off consumer demand for goods and services, which has outstripped supply, driving up prices. But if the central bank chokes off demand aggressively when prices are already crimping consumption, it could cause a recession.
Consumers have hardly stopped spending. Overall demand remains strong, particularly for vacation travel, restaurant meals and other services that many families avoided earlier in the pandemic.
Still, several forecasters said Thursday that they now believed U.S. gross domestic product, adjusted for inflation, shrank in the second quarter. That would be the second consecutive decline — a common, though unofficial, definition of a recession. Most economists say the United States has not yet entered a recession under the more formal definition, which takes into account a variety of economic indicators, but they say the risks are growing.
The data released Thursday did hint at some potential moderation in inflation. The Personal Consumption Expenditures price index, which the Fed officially targets when it aims for 2 percent inflation on average over time, climbed 6.3 percent from a year earlier, matching the April increase. From a month earlier, it picked up 0.6 percent, a rapid pace as gas prices rose.
But the core price index, which strips out volatile food and fuel prices, climbed 4.7 percent over the past year, down slightly from 4.9 percent in the prior reading. That core measure picked up by 0.3 percent from April, roughly matching the previous few months.
Policymakers “are probably quietly sitting there and feeling a bit relieved” that core price increases have been moderating, said Ian Shepherdson, the chief economist at Pantheon Macroeconomics. But inflation remains very high, its outlook hinges on variables like the war in Ukraine, and the latest data is unlikely to lead the Fed to change course.
“Now is not the time to declare even the hint of potential victory,” Mr. Shepherdson said.
Inflation is taking a toll on consumers’ finances, and their economic outlook. Fifty-two percent of American adults say they are worse off financially than they were a year ago, according to a survey for The New York Times conducted June 13-19 by the online research platform Momentive. Ninety-two percent say they are concerned about inflation, including 70 percent who say they are “very concerned.”
Until recently, there was little sign that consumers’ dour mood was affecting their spending much. But that may be starting to change. Consumer spending, not adjusted for inflation, rose 0.2 percent in May, the weakest gain this year, and spending on goods, where price increases have been fastest, fell.
In other areas, consumers are spending more but getting less: Households bought almost exactly the same amount of gasoline in May as in April, for example, but paid 4 percent more for it.
Tim Trull put $35 worth of gas in his truck one recent Friday, and was on empty again after a weekend trip to visit his parents 30 miles away. So he is looking for other places to cut back. Trips to the grocery store have become a dull routine: bread, cheese, eggs, milk, whatever lunch meat is on sale. Mr. Trull said he no longer even walked down the meat aisle.
“I like my Raisin Bran, but I can’t even buy Raisin Bran,” he said. “Raisin Bran’s almost $7 a box right now.”
Mr. Trull, 51, got a 50-cent-an-hour raise at Christmas, but inflation has more than wiped that out — especially because the furniture plant where he works in Hickory, N.C., has begun cutting back on overtime. Now, with talk of a recession, he is worried about losing his job.
“I just have some bad feelings that eventually it’ll peter off and they’ll start laying people off again,” he said. “Who’s going to buy furniture when you’re deciding gas, food or a new love seat?”
Stories like Mr. Trull’s highlight the risk facing the economy if the job market slows. Despite the dip in May, Americans’ income, in the aggregate, has mostly kept up with inflation thanks to rising wages and strong job growth.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
The job market is likely to cool in coming months, however, as the Fed raises interest rates in an effort to tame inflation. Weaker wage growth and slower job gains — or, worse, outright job losses — would dent income growth and may make people more reluctant to dip into their savings. That could make a recession more likely.
“If we start to see that slowdown in job growth, if we start to see some slowdown in wage growth, if we start to see a pickup in jobless claims, then I think the story really does start to shift,” said Michelle Meyer, the chief U.S. economist for the Mastercard Economics Institute.
U.S. households also built up trillions of dollars in savings during the pandemic, in part because of government aid. Those savings could, at least in theory, help consumers keep spending even if their incomes fall further behind inflation. Households are already saving less in order to keep spending: Americans saved 5.4 percent of their after-tax income in May, up slightly from April but below the roughly 7 percent rate in the years before the pandemic.
But families may be reluctant to dig too deep into their rainy-day funds if they are worried about a possible recession, said Pablo Villanueva, senior U.S. economist for UBS.
“The last few months, the consumer has started to rely more on a lower savings rate to finance consumption, and that can only go on for so long, particularly in the context of very weak consumer confidence,” he said.
