Americans accumulated trillions of dollars in savings during the pandemic. Now, with prices rising at their fastest pace in decades, they are tapping into that reserve to keep spending.
Consumer spending rose 0.9 percent in April, the Commerce Department said Friday, as Americans got rid of high prices to buy tickets for flights, sporting events and other experiences they had to give up earlier. in the pandemic. Car sales also rose as car buyers snapped up vehicles after months of shortages.
Earnings are also rising, the result of a strong job market and the fastest wage growth in decades. But income isn’t keeping up with spending or rising prices: After-tax income rose 0.3 percent in April from a month earlier and was flat after adjusting for inflation.
As a result, Americans are boosting 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, combined with reduced spending on many leisure activities, allowed Americans to accumulate a substantial pool of additional savings — $2.5 trillion or more, by some estimates. That cushion could allow consumers to keep spending even as prices rise. A snapshot of the financial health of Americans taken last fall and released by the Federal Reserve this week found that 78 percent of those surveyed felt they were “at least okay,” the highest rate in the nine-year history of the survey.
But relying on savings is unsustainable in the long run. Economists say many low-income households have likely already exhausted their savings, or will in the coming months, especially as high gas and food prices continue to take their toll. Balances on credit cards and similar types of debt increased at an annual rate of 35.3 percent in March, the largest monthly increase since 1998, according to data from the Federal Reserve.
“If you’re relying on your credit card to fund your spending, that’s by definition not sustainable,” said Tim Quinlan, a senior economist at Wells Fargo. Consumer spending has held up better than most forecasters expected, he said, but is likely to slow in coming months.
Consumers aren’t likely to get much relief from rising prices any time soon. Inflation cooled slightly in April but remained near a four-decade high.
Consumer prices rose 0.2 percent last month from March and 6.3 percent from a year earlier, the Commerce Department report showed. That was lower than the 6.6 percent annual increase in March, which was the fastest pace of inflation since 1982.
Economists and investors are closely watching the report’s Personal Consumption Expenditures price index, an alternative to the better-known Consumer Price Index, because the Fed prefers it as a measure of inflation. The central bank has been raising interest rates and has announced that it will start drawing down its assets in a bid to cool the economy and control inflation.
In a statement issued by the White House on Friday, President Biden called the drop in inflation “a sign of progress, even as we have more work to do.”
The slowdown in inflation in April was largely due to a drop in the price of gasoline and other energy sources. Gasoline prices soared in February and March in large part due to the Russian invasion of Ukraine, then moderated somewhat in April. However, they have risen again in recent weeks, which could cause inflation measures to rise again in May. Food prices have also risen rapidly in recent months, a pattern that continued in April.
When volatile food and fuel categories are removed, consumer prices rose 4.9 percent in April from a year earlier. That core measure, which some economists see as a more reliable guide to the core rate of inflation, rose 0.3 percent from a month earlier, little changed from the rate of increase in March.
The comparatively tame rise in core prices in the data released on Friday contrasted with the sharp acceleration to the equivalent extent in the Consumer Price Index report released by the Labor Department this month. However, the divergence was mainly due to differences in the way the two measures count airfares, and economists said the Fed was unlikely to be very comfortable with the Commerce Department data.
“My suspicion is that they will probably pick up on the slowdown,” said Omair Sharif, founder of research firm Inflation Insights. He noted that the core index had also slowed in the fall, only to pick up again late in the year, catching the Fed off guard.
Many forecasters believe that the headline inflation rate peaked in March and that April marked the beginning of a gradual cooling. But the recent spike in gasoline prices threatens to complicate that picture. And even if inflation continues to decline, prices will continue to rise much faster than the Federal Reserve’s 2 percent target over time.
The public, Quinlan said, is unlikely to view the slight moderation in inflation as something to celebrate.
“For them, year-over-year price growth doesn’t matter,” he said. “It’s: Why is a shitty lunch $12 now?”
Inflation has weighed on consumer confidence, which fell 10.4 percent in May to its lowest level in more than a decade, according to a long-running survey from the University of Michigan. However, so far that pessimism has not translated into a reduction in spending.
“At least in the second quarter, consumers really had their wallets open wide,” said Kathy Bostjancic, chief US economist at Oxford Economics. “We think eventually that will have limits. Right now we all feel repressed and we just need to travel. But next year, it’s a different story.”
More spending has shifted toward experiences like hotel stays, concerts and haircuts in recent months as people become more comfortable in crowded spaces. The prices of goods have risen faster than the cost of services, in part due to supply chain entanglements and the war in Ukraine. Adjusted for inflation, spending on goods rose 1 percent over the month, while spending on services rose 0.5 percent.
That dynamic has rattled big box stores like Walmart and Target, which have been unable to pass on higher costs to shoppers. Shares of discount retailers such as Dollar Tree, by contrast, rose on Thursday as they reported sales gains and raised their earnings forecasts.