US consumers increased spending in April as inflation rose |
WASHINGTON (AP) – Americans increased spending 0.5% in April, a slowdown after a massive gain in March that was fueled by the distribution of billions of dollars in individual stimulus checks.
Even with a 4.7% spending surge retreating in March, April’s increase provided further evidence that consumers are driving a stronger recovery from the pandemic recession. April’s gain was led by a 1.1% rise in spending on services, the sector that covers air travel, hotels and restaurants – areas that have been devastated by closures caused by the pandemic it a year ago.
Friday’s report also showed inflation by a measure preferred by the Federal Reserve jumped 3.6% larger than expected for the 12 months that ended in April. Even excluding the volatile food and energy categories, core inflation during this period was still high at 3.1%.
Both numbers are well above the Fed’s annual inflation target of 2%. Yet the current year-over-year inflation figures are likely temporarily high. Indeed, when the pandemic crippled the economy in the early spring of last year, many prices fell before rebounding later in the year. This factor at least partly explains why the 12-month inflation numbers seem so high. They are expected to ease in the coming months, although inflationary pressures have appeared on the prices of many goods and components – in most cases a consequence of supply shortages.
In its Friday report on consumer spending in April, the government said purchases of goods were down 0.6%. For some economists, this suggested that consumers have embarked on a long overdue abandonment of the large purchases of goods that many of them had made while at home to devote themselves to services, from haircuts to plane tickets to restaurant meals.
“The great rotation from consumer spending to services has started,” said Gregory Daco, chief US economist at Oxford Economics. “As health conditions continue to improve and the economy reopens, a generous fiscal stimulus, a rebound in employment and growing optimism will help release pent-up demand.”
Daco predicts that consumer spending, the main driver of the US economy, could grow by about 9.5% this year. If so, it would amount to the strongest such demonstration since 1946, when the country emerged from WWII rationing and other restrictions.
Friday’s Commerce Department report also showed personal income, which drives spending, fell 13.1% in April. But the drop in income was expected, after a record income gain of 20.9% in March that reflected the billions in one-off checks for most adults.
The rise in consumer spending in April, slight compared to March, confirmed the idea that the economy is rebounding quickly, with individuals and businesses growing more confident about spending, hiring and investing. On Thursday, the government estimated that the economy grew at a robust rate of 6.4% in the January-March quarter, fueled largely by consumer and business spending.
The economy is believed to expand even faster in the current quarter from April to June, with many analysts predicting an annual figure of 10% or more.
The outlook for the rest of the year is also improving, thanks to billions of additional dollars in government support, increased mobility as vaccinations continue to rise and an increase in pent-up consumer demand. More and more Americans are venturing out to shop, travel, dine out, and gather in large groups at venues for sport and entertainment. For the whole of 2021, many economists predict that growth, as measured by gross domestic product, will reach its fastest pace since at least 1984.
As the recovery gains momentum rapidly, the risk of a pick-up in inflation continues to loom. If inflation, dormant for years, starts to accelerate steadily, it could force the Fed to respond with interest rate hikes that could derail the recovery.
Gus Faucher, chief economist at PNC Financial, said that while April’s inflation figures exceeded expectations, much of the increase was related to supply chain bottlenecks in markets. areas such as computer chips and automobiles.
“We have temporary inflationary pressures,” Faucher said, “but these are going to subside, so there is nothing the Federal Reserve is concerned about.”
When asked about rising inflation, President Jerome Powell and other Fed officials have repeatedly stated that they believe the spikes in inflation that have manifested themselves with some products will prove to be temporary, as the chains supply are not obstructed.
Treasury Secretary Janet Yellen echoed the sentiment on Thursday, but also warned a House committee that the economy could endure a “bumpy” period with high inflation until the end of the year.
The 3.6% rise in prices over the past 12 months was the largest year-over-year increase since September 2008. Excluding volatile food and energy costs, the 3.1% increase was year-over-year core inflation was the strongest since 1992. And the one-month increase in core inflation in April, 0.7%, was the largest since nineteen eighty one.
In its expenditure and income report on Friday, the government also said the savings rate was still high at 14.9% in April, from 27.7% in March. Many Americans have accumulated savings over the past year, either from government stimulus checks or squatting in their homes and avoiding spending a lot. Economists generally believe that the savings pool will help fuel the spending boom they envision in the coming months.