Supply: consumer resilience threatened by inflationary pressures
US consumers continue to spend despite the end of federal stimulus programs last year. According to the US Census Bureau, retail sales in January were up 7.5% from a year ago. Holiday sales rose a record 14.1% last year, far exceeding expectations.
Part of the sales gain was due to higher prices in everything from breakfast cereals to steak and wood. Economists warn retail sales data has not been adjusted for inflation, which could artificially boost sales figures for months to come.
With prices rising faster than expected in January, the Federal Open Market Committee has become more hawkish on interest rate hikes by March. St. Louis Federal Reserve Chairman James Bullard said he believed the first interest rate hike would be more aggressive than expected.
Randall Waldron, professor of economics at John Brown University, said consumers and businesses have so far managed inflationary pressures. That said, Waldron expects inflation to get worse before it gets better, which should weigh on consumer purchasing power in the first half of this year.
While savings rates have increased amid the pandemic, a recent Bankrate.com survey found that only 44% of consumers had enough savings to cover an unexpected $1,000 expense. While 20% would put payment on a credit card, 15% said they would cut costs elsewhere to cover the cost. One in 10 people would ask friends and family for help, and 4% would take out a personal loan.
Greg McBride, CFA, chief financial analyst for Bankrate, said the survey found borrowing remains high, with the majority of households needing help to cover a $1,000 expense.
Growing household debt is also a concern. Wells Fargo Securities economists reported household debt balances rose $333 million in the fourth quarter, marking the largest quarterly rise in nearly 15 years. Mortgage and credit card balances also saw the largest increases in the fourth quarter since before the pandemic. Consumer debt jumped in the fourth quarter to nearly $15.6 trillion.
Wells Fargo Securities chief economist Jay Bryson expects some inflationary prices to slow in the coming months as more spending shifts from goods to services.
“While the most immediate price distortions caused by the pandemic and the initial policy response dissipate, wage pressures continue to build and point to a more consistent source of inflation. The result is that inflation is likely to remain uncomfortably high. for consumers, businesses and the Fed,” Bryson said.
February consumer sentiment, according to the University of Michigan survey, indicates that consumer worries about inflation have risen to their highest level since 2008 and have weighed on consumers’ views on their household finances. housework.
Wells Fargo economists said the highest inflation in more than 40 years is challenging consumers’ disposable income, likely making them more cost-conscious. Wells Fargo also reported that consumer credit card debt rose $52 billion in the fourth quarter, the largest quarterly increase in the 22-year history of published data. Use of revolving credit cards rose just $2.1 billion in December, the smallest gain since April 2021, as consumers cut back on year-end spending.
“Inflationary headwinds on consumer activity are expected to accelerate through 2022, as evidenced by the recent deterioration in consumer sentiment,” Bryson said.
The University of Michigan’s preliminary consumer sentiment index for the first half of February fell to 61.7, its lowest level since October 2011. The decline in sentiment was entirely among households with incomes of 100,000 $ or more. The survey found that nearly half of consumers expect disposable income to decline over the year, as prices rise faster than wages. February’s sentiment reading also included fewer households citing savings wealth, which could result from falling stock prices this year and eroding incomes from rising prices of goods and services.
“Recent declines have been driven by weakening personal financial outlooks, largely due to higher inflation, lower confidence in government economic policies and the worst long-term economic outlook since. a decade,” said Richard Curtin, chief economist at the University. from Michigan.
Curtain said the decline in sentiment signaled the start of a sustained slowdown in consumer spending. However, the depth of the crisis is subject to several caveats that were not present in previous downturns, including the impact of unspent stimulus funds and the disruption to spending and work situations caused by the pandemic. He said households had amassed substantial savings from stimulus funds and limited consumption choices amid the pandemic. But rising interest rates and price inflation will erode savings.
The National Retail Federation (NRF) said there were near-term challenges with inflationary pressures, labor shortages, the impacts of COVID-19 and uncertainty related to international tensions in Russia and China.
Through January, retail spending held up, indicating consumers are resisting near-term inflationary pressures, according to NRF CEO Matthew Shay. The trade group is bullish on consumer spending as economic forces are expected to moderate later this year.
This sentiment contrasts with consumer data released by Deloitte in January. Deloitte found that consumers felt more prudent about their spending, not because of Omicron, but because of higher prices. The proportion of consumers who also expressed concerns about savings has intensified compared to last fall. Deloitte reports that 68% of survey respondents said they faced rising grocery prices in January and their intentions to buy new vehicles dropped to 16%.
Another report from Resonate found that 34% of consumers have less discretionary income, and nearly four in five cite best prices as the criteria for selecting the #1 retailer. Although they have a long list of wish list, they need to keep it affordable.
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