US consumers hang in there despite big bite from inflation

Bloomberg

The reports of retail sales and consumer sentiment offered a glimmer of optimism that Americans aren’t ready to pull back on spending en masse in the face of decades-high inflation.
Granted, the 0.5% rise in March sales was dwarfed by an even bigger increase in inflation that shows real spending is softening after a stronger start to the year. But price pressures are expected to simmer down a bit in coming months, and the University of Michigan’s sentiment survey showed households grew more upbeat about their financial situations.
These latest developments are a hopeful sign for the economy, even as more economists have raised their odds of recession as the Federal Reserve scrambles to fight off inflation with more aggressive monetary policy.
“Inflation is not going away, but it will likely stop getting worse and that means less of a headwind for spending,” Wells Fargo & Co economists Tim Quinlan and Shannon Seery said.
Consumer spending is by far the largest contributor to economic activity, and economists are keenly looking for any sign that the financial health of households is weakening. However, Bank of America Institute data showed strong growth in credit card spending continued into April, especially among lower-income households.
“In short, the labour market and the state of consumers’ finances are good reasons to treat the doomsayers with caution,” David Tinsley, director of the Bank of America Institute, said.
Retail sales last month were helped by a surge in gas station receipts that were boosted by higher per-gallon costs for fuel. But some discretionary categories like apparel and restaurant spending also showed growth, counter to expectations that inflation would slow such purchases.
“In some discretionary categories, such as apparel and restaurant spending, the rise in nominal sales outstripped inflation and suggested that the easing in pandemic-related restrictions is helping consumer spending, while in other components it was clear that inflation played a large role in boosting spending,” Omair Sharif, founder of Inflation Insights LLC, said.
A strong labour market is supporting spending and sentiment.
Consumer prices rose 8.5% in March from a year ago, the most since 1981, and producer prices jumped the most in records back to 2010.
Earnings reports also showed merchants like Bed Bath & Beyond Co and grocer Albertsons Inc are seeing softer demand due to inflation.