The Federal Open Market Committee (FOMC or the "Fed") finally seems to be serious about fighting inflation and today announced a three-quarter point rate hike to the fed funds rate. The market, so far, seems buoyed by the move.
The idea behind raising rates to fight inflation is to lower the amount of liquidity in the market and reduce overall demand by slowing down consumer spending. But for many months, they told us they thought the higher inflation numbers we have been seeing would subside by themselves, mostly as a consequence of the ongoing year-over-year comparisons to an economy that was coming back unevenly, in stop start fashion, from a near total shutdown during the pandemic.
Moody’s Analytics recently put out an interesting chart to show how that consumer spending has been tracking.
What this shows is real consumer spending on trend and the breakdown between goods and services spending over the last four plus years. And what we can see is the huge jump in goods spending vs services since February of 2020. This makes complete sense given the shutdown of restaurants, theatres, hotels and resorts, airlines, etc.
What’s more interesting is the fact that we have just recently come back to trend in total spending. But the gap between services and goods is still fairly wide with goods spending still well above trend. It may take months before we see services spending come back to where we were before the pandemic. And if we see continued declines in the spendiest ticket items in the goods component like autos and homes, that could snap back to trend even quicker.
Meanwhile, the Fed is getting aggressive to slow overall spending. We can hope (pray) they don’t go too far, too fast.
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