(Washington) US households continued to spend solidly in April as inflation marked a welcome slowdown for consumers’ wallets and for President Joe Biden’s approval ratings.
Posted at 8:54 a.m.
Updated at 9:25 a.m.
Prices rose 6.3% year on year in April, from 6.6% in March, a 40-year high, according to the PCE index released Friday by the Commerce Department. This measure, favored by the American central bank (Fed) which confirms the trend outlined earlier in the month by other measures of inflation.
In just one month, the decline is even more marked, at 0.2% against 0.9% last month. This is the lowest price increase since November 2020.
Joe Biden hailed a “sign of progress, although we still have a lot of work to do”, assuring that the fight against rising prices was his “economic priority”.
“Inflation remains too high and rising prices for [Vladimir] Putin continues to weigh on food and energy costs,” the US president lamented.
In March, the war in Ukraine had caused the prices of gasoline and food in particular to soar, exacerbating the supply difficulties which have lasted for months, the lasting consequences of the pandemic.
Consumption still solid
The question now is whether the pressure on prices will weaken permanently, or if this respite will only be short-lived.
“Many speak of March as the peak of inflation […]. We’re not so sure, given the risks we still face with the war in Ukraine and the lockdowns in China,” warned Diane Swonk, chief economist for Grant Thornton.
Touched on the portfolio, American households paid a little attention to their spending last month, but these remained sustained, for goods as for services, and better than expected: they increased by 0.9%, less than the 1.4% increase in March, but more than the 0.6% expected.
Skyrocketing fuel prices have prompted sobriety, and spending has fallen. On the other hand, consumers bought cars and spare parts.
On the services side, the improvement is widespread: restaurants, tourism, but also rents or medical services. Indeed, underlines Diane Swonk, certain non-urgent surgical operations or “routine medical appointments which had been delayed by the pandemic, are now rescheduled”.
“In a context of high inflation and a limited supply of goods, consumers continue to turn to purchases of services, which should fuel economic growth this summer”, comment Lydia Boussour and Kathy Bostjancic, economists for Oxford Economics .
Consumption, “the main pillar of the economy, is still solid in the face of historic inflation and rising interest rates. But a winding road awaits the US economy which we believe will slow significantly as we approach 2023,” they add.
A recession, rather next year, threatens the economy.
Dip into savings
Incomes, adjusted for inflation, rose by 0.4% in April, slightly less than in March (0.5%).
“Households continued to draw on their savings to finance their spending. The personal savings rate fell by 0.6 points to 4.4% in April – the lowest level since September 2008”, underline Lydia Boussour and Kathy Bostjancic.
With very contrasting situations: “households with high and middle incomes still have some accumulated savings”, unlike those whose incomes are the lowest, who “are struggling to make ends meet. Inequalities are getting worse,” warns Diane Swonk.
Inflation is squeezing Americans’ purchasing power and threatening economic growth, and is a serious thorn in the side of US President Joe Biden.
The American central bank, the Fed, is on the front line and has assured that it will do everything to bring inflation back into line. Even if this slows down the growth of economic activity for a while, and causes unemployment to rise a little.
It has thus begun to vigorously raise its key rates and should continue.
This has the effect of increasing the cost of loans contracted by individuals and professionals from commercial banks. Because when credit is more expensive, we borrow less and therefore consume less, which eases the pressure on prices.