Inflation weighed on consumer spending growth in February

Consumer spending growth, a key driver of the economy, slowed sharply in February as the Covid-19 omicron surge eased and inflation accelerated amid the Russian invasion of Ukraine.

US households increased shipments a seasonally adjusted 0.2% mom in February, compared with a revised rate of 2.7% in January, as spending recovered from an Omicron-related slump in December, the Commerce Department said on Thursday with.

Household incomes rose in February as the unemployment rate fell and employers scramble to hire new workers. Personal income rose 0.5% mom in February, a rebound after being almost flat in January, but inflation rose at a faster pace. After-tax income adjusted for inflation fell in February for the seventh straight month to its lowest level since March 2020, the Commerce Department said.

The data adds up to a picture of the growing economy as shoppers benefit from a strong job market and rising wages, but see those gains being eroded by rising inflation, economists said.

Inflation “will be an even bigger drag in March with rising energy prices after Russia’s invasion of Ukraine,” said Gus Faucher, chief economist at PNC Financial Services Group.

Consumer prices rose 0.6% month-on-month and 6.4% year-on-year, a new 40-year high as measured by the Department’s Personal Consumption Price Index, the Federal Reserve’s preferred measure. Annual core PCE inflation, which excludes volatile food and energy prices, rose to 5.4% in February.

In February, the wave of Covid-19 infections from the Omicron variant subsided, prompting consumers to spend more on services such as dining out and travel. Services spending rose 0.9% in February, the sharpest since last July, while goods spending fell 1%, mainly due to lower vehicle spending as prices continued to rise and supply chain issues affect availability.

The shift toward spending on services shows consumers are rebalancing after Omicron hit demand for restaurant meals and entertainment, forcing some Americans to cancel travel plans.

Russia’s attack on Ukraine helped push oil prices above $100 a barrel for the first time since 2014. For example, rising oil prices could further fuel inflation across the US economy. Photo illustration: Todd Johnson

Travel, both leisure and business, has recovered faster than expected from Omicron, airline executives said. Major U.S. airlines said in early March that their first-quarter 2022 revenues are likely to be at the high end of what they were expecting at the start of the year, or better.

Kim Cook, a travel agency owner in Overland Park, Kansas, said airline tickets and hotel prices don’t put her customers off.


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I am the chef

Kim Cook, the owner of Love to Travel, a travel agency specializing in tropical destinations in Overland Park, Kansas, said high airfare and hotel prices don’t stop her clients from booking trips, especially with large groups of friends and Family.

“They say, ‘I know it’s going to be expensive, but we haven’t been anywhere in two years, we really want to do this,'” Ms Cook said. Having built up savings during the pandemic, “they have the money to burn.”

US jobless claims edged up last week but remained near historic lows, suggesting a strong labor market with employers holding on to workers amid high demand.

Consumers are sending mixed signals about how they feel about the direction of the economy. The Conference Board Consumer Confidence Index for March showed consumers are optimistic about the Covid situation and the job market but concerned about the future impact of the Russian invasion of Ukraine on inflation. The invasion has pushed up energy and commodity prices, contributing to entangled supply chains and commodity shortages that have already exacerbated price pressures.

“The outlook for the future is definitely not as rosy as it used to be,” said Alex Lin, Bank of America economist.

“We expect growth to slow and with it consumer spending.”

While companies largely say they can pass on price increases, they warn there are limits to what consumers are willing to tolerate before high prices begin to dampen demand.

Survey data shows that inflation and shortages have already prompted consumers to switch from more expensive brands to cheaper options. According to a survey conducted from May 2020 to August 2021 by private label consultancy Daymon Worldwide Inc., about 70% of US shoppers said they bought a new or different brand than before the pandemic.

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Meghna Marathe, a counselor in Jersey City, NJ, said that approaching parenthood has made her more cost-conscious.


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Meghna Marathe

“Prices will force the consumer to switch,” said Lindsey Piegza, chief economist at Stifel Financial corp

“If you’re talking about the disruption of two economies that play important roles in energy and agriculture, it’s going to affect staple food prices.”

Meghna Marathe, a 29-year-old counselor from Jersey City, NJ, is expecting her first child with her husband in August. She said imminent parenthood has made her much more cost-conscious than usual, a change only compounded by inflated prices.

“I’ve always been kind of able to, for the most part, not hesitate to buy anything,” she said. Now when she goes grocery shopping for the baby, she is more cost conscious and focuses on what the baby needs and not what is “just fun”.

“A lot of moms-to-be go to the stores and look at all the cute stuff they can buy for the nursery — I’ve been window shopping but haven’t bought any of them,” she said.

write to Gabriel T. Rubin at gabriel.rubin@wsj.com

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https://www.wsj.com/articles/consumer-spending-personal-income-february-2022-11648682420?mod=pls_whats_news_us_business_f Inflation weighed on consumer spending growth in February

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