Consumer Spending & Inflation

Bank of America’s Liz Krisberg shared some thoughts on consumer spending in a recent CNBC interview. Her bottom line: spending may be moderating, but remains stable and positive. It is true that consumers are spending more on necessities, primarily because gasoline prices are rising again. This trend may continue to crowd out some discretionary spending (i.e. furniture, apparel). But data suggest that most households are on a pretty solid financial footing. Yes, overall credit card utilization is rising, but she says it remains 2-3% below pre-pandemic levels. One area of specific concern is that lower income households are nursing higher credit card balances. But she sees an “offset” in that wage growth is disproportionately higher for lower income workers at the moment. And wage growth is now outpacing inflation.

A Bloomberg opinion piece by Cameron Crise gives another reason why households have remained financially resilient. Federal Reserve data shows that household net worth is near record levels. This measure is independent of income, and measures the value of assets minus liabilities. Two-thirds of American households own a home, and we know that home prices (along with equity) are still marching higher. This may help explain why consumers feel OK spending even though savings rates are falling.

Tomorrow the Bureau of Labor Statistics will release August inflation data. Most investors think it will come in higher than the last couple of months, around 3.5%. Economist Mohamed El-Erian believes the US economy is strong enough to prevent inflation falling back to the Federal Reserve’s 2% target. But that’s OK. He says history proves we can live with inflation higher than 2% as long as it’s stable. “Don’t forget, [the Fed’s 2% requirement] is completely arbitrary.” He cautions that the Fed needs to be flexible; there’s no need to push interest rates higher and risk a recession. After all, we still don’t know the full economic impact of all the monetary tightening over the past 18 months. All of that is true, but thus far the Fed hasn’t signaled any flexibility regarding its 2% target.