Inflation takes its toll on American consumers

Rising inflation took a toll on US consumers in May, as evidenced by the University of Michigan’s May Consumer Sentiment index released on Friday. It came in at 59.1, down from 65.2 in April, the lowest number in more than a decade thanks to an increase in the cost of living as measured by various indexes.

The first index is the Consumer Expectations Inflation, released by the Federal Reserve Bank of New York earlier in the week. It reached an annual rate of 6.3% in April, declining slightly from 6.6% in March.

The second index is the Consumer Price Index (CPI), a measure of inflation at the retail level, released by the Bureau of Labor Statistics (BLS) on Wednesday. It increased at an annual rate of 8.3% in April, slightly down from 8.5% in March. However, core inflation, which excludes the volatile food and energy component from the calculations, rose 6.2%, meaning that inflation is now spreading beyond food and energy.

The third number is the Producer Price Index (PPI), a measure of inflation at the wholesale level, released by the BLS on Thursday. It hit 11%, a sign that prices will remain elevated for several months as retailers pass on wholesale price increases to consumers.

Rising inflation lowers the real value of income, especially the income of people at the bottom end of the income distribution. Therefore, it depresses consumer confidence and ultimately consumer spending.

“Consumers’ assessment of their current financial situation relative to a year ago is at its lowest reading since 2013, with 36% of consumers attributing their negative assessment to inflation,” the Michigan report read. “Purchase conditions for durable goods reached their lowest reading since the question began to appear in monthly surveys in 1978, again mainly due to high prices. The average expected annual inflation rate was 5.4%, with little change in the last three months, and more than 4.6% in May 2021”.

Depressed consumer sentiment is a mixed blessing for the US economy. On the one hand, it is a sign that the US economy is slowing down, as consumer spending accounts for close to two-thirds of GDP, which plunged in the first quarter of 2022 due to a strong dollar that depressed US trade. . Therefore, a significant drop in consumer spending could push the US economy into a recession at the end of the second quarter. That’s when GDP falls for two consecutive quarters in a row.

On the other hand, depressed consumer spending could help alleviate inflationary pressures, making it easier for the Federal Reserve to control inflation without significant increases in interest rates.

This Friday, Wall Street appears to be focusing on the second scenario rather than the first, sending all major averages sharply higher in morning trading. It remains to be seen whether the rally will hold until the end of the trading session or fade like many rallies of late.

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