It Could Be a Cool Summer For The US Economy, Inflation Report Suggests

Key Takeaways

  • A report on consumer spending and inflation showed incomes aren’t keeping up with prices, as consumers lost buying power in April.
  • Consumer spending decelerated, suggesting people are cutting back as prices pressure household budgets.
  • Businesses may become reluctant to raise prices, as their customers become more budget-conscious, economists said.

Just as it’s heating up outside, the economy seems to be cooling off.

Inflation, spending, and income all downshifted in April, a report from the Bureau of Economic Analysis showed Friday. If Friday’s report is the beginning of a trend, the economy could be entering a new phase, one in which less money changes hands. 

Households—whose budgets have been pressured by elevated inflation, high interest rates for all kinds of loans and a job market where raises are becoming harder to get—may be forced to cut back their spending. In turn, merchants could face pressure to keep prices in check.

In other words, the economy may be meaningfully slowing down, just as officials at the Federal Reserve hope to accomplish with their campaign of anti-inflation interest rate hikes.

“Rapidly rising prices in recent months have depleted personal savings, and a slowing labor market may finally be taking a toll on some consumers’ willingness and ability to spend,” Scott Anderson, chief U.S. economist at BMO Capital Markets, wrote in a commentary. 

Consumers Could Be Slowing Their Spending Pace

The details of the report supported the idea that consumer spending, the most important part of the economy, could be running out of steam after a long period of rapid growth. Spending only increased 0.2% in April after jumping 0.7% in March and actually fell 0.1% after adjusting for inflation. Inflation-adjusted after-tax income also fell 0.1%, the fourth decline in the last 12 months. 

“Consumer spending in the first month of the new quarter slowed as real disposable incomes fell,” Jeffrey Roach, Chief Economist for LPL Financial, wrote in a commentary. “Businesses need to prepare for an environment where consumers are not splurging like they were last year.”

It wasn’t just Friday’s report that hinted at a downshift in consumer spending. The measure of first-quarter gross domestic product (GDP) was revised Thursday, showing consumer spending decelerated.

“On the one hand, the slowing GDP and slowing personal consumption are a sign that the economic expansion is cooling, which could be a concern for companies and stock market investors,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance Thursday. “But on the other hand, slowing consumption and economic growth could be just the news we need to see in order for the rate of inflation to keep coming down and allow the Fed to reduce interest rates after all.”

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