It could be a cold summer for the US economy, inflation report suggests

Key takeaways

  • A report on consumer spending and inflation showed that incomes did not keep pace with prices as consumers lost purchasing power in April.
  • People say they are cutting back as consumer spending slows and prices put pressure on household budgets.
  • Businesses may be reluctant to raise prices because their customers will be more budget-conscious, economists said.

As it warms up outside, so does the economy.

Inflation, spending and income all fell in April, a report from the Bureau of Economic Analysis showed on Friday. If Friday’s report is the start of a trend, the economy could enter a new phase in which less money changes hands.

Households—stressed by elevated inflation, high interest rates on all types of credit, and a tight job market—may be forced to cut back on their spending. In turn, traders will face pressure to keep prices under control.

In other words, the economy could meaningfully slow down just as Federal Reserve officials hope to fulfill their campaign of anti-inflationary interest rate hikes.

„Rapidly rising prices in recent months have eroded personal savings, and labor market momentum may finally be weighing on some consumers’ willingness and ability to spend,” Scott Anderson, chief U.S. economist at BMO Capital Markets, wrote in a commentary.

Consumers may slow their spending pace

Details of the report supported the idea that consumer spending, the most important part of the economy, may be running out of steam after a long period of rapid growth. Spending rose only 0.2% in April after rising 0.7% in March and actually fell 0.1% after adjusting for inflation. Inflation-adjusted after-tax earnings also fell 0.1%, the fourth decline in the past 12 months.

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„Consumer spending eased in the first month of the new quarter as real disposable income fell,” Jeffrey Roach, chief economist at LPL Funds, wrote in a commentary. „Businesses need to prepare for an environment where consumers are not going as far as last year.”

Friday’s report wasn’t the only one that pointed to a slowdown in consumer spending. A measure of first-quarter gross domestic product (GDP) was revised up on Thursday, showing a slowdown in consumer spending.

„On the one hand, slowing GDP and declining personal consumption are signs that the economic expansion is cooling, which could be a concern for companies and stock market investors,” Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, wrote Thursday. „But on the other hand, a slowdown in consumption and economic growth may be the message we need to see for inflation to continue to decline and above all to allow the central bank to cut interest rates.”

Update—June 2, 2024: This article has been updated with a new image.

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