Consumer Spending and Inflation

Consumer Spending and Inflation

June 17, 2022

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.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.


All investing involves risk including loss of principal. No strategy assures success or protects against loss.


Any economic forecasts set forth in this material may not develop as predicted.


There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.


The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.


The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.


The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.