The Federal Reserve’s Personal Consumption Expenditures Index (PCE), its preferred inflation indicator, rose just 0.2 percent in April to mark the smallest increase in a year and a half, aided by a decline in gas prices.
The rise in the so-called personal consumption price index was the smallest since November 2020 and is cheering the financial markets as a first sign that the inflation burden may be easing.
The rate of inflation over the past year, based on the PCE, slowed to 6.3 percent in April from a 40-year high of 6.6 percent in March. It was also the first decline in a year and a half.
This is while consumers’ personal consumption expenditures have risen 6 percent in a year—see the above FRED graph. This graph in one picture shows how much consumer spending has skyrocketed since the pandemic—after just 2 percent average annual growth rates since the Great Recession. It is the highest spending increases since 1980 caused by the record inflation of the 1970s.
But maybe inflation will not be such a problem this time? If inflation continues to moderate—despite the Ukraine war and China’s slowdown—consumers could continue to be the engine of growth without the sky-high inflation of the 1970s that plagued Americans, then. Most of the supply shortages are temporary shocks caused by the pandemic and above-mentioned issues. The U.S. now leads even China (temporarily) as the world’s fastest growing economy while China wrestles with its own COVID crisis.
That is the big question. Corporations have been reporting record profits, and able to pass most of their increased product costs onto consumers. Will they continue to hire more workers at the torrid pace since the pandemic recovery, which will keep consumers happy and continuing their spending ways?
The number of Americans filing new claims for unemployment benefits fell more than expected last week as the labor market remains tight amid strong demand for workers despite rising interest rates and tightening financial conditions.
And with a record 11.5 million job openings at the end of March, layoffs are likely to be minimal and people who lose a job can easily find another one.
The minutes of the Fed's May 3-4 meeting published on Wednesday showed officials commenting that "demand for labor continued to outstrip available supply across many parts of the economy and that their business contacts continued to report difficulties in hiring and retaining workers." Many expected the labor market to remain tight and wage pressures to stay elevated for some time.
We must now wait to see what the Fed’s push to raise interest rates will do to future growth. Will it slow consumers spending and help to slow the prices rises further, averting the re-occurrence of a 1970’s-style stagflation?
Harlan Green © 2022
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