Home / Market Update / Forex Market / US Diminished purchasing power Impacts real spending

US Diminished purchasing power Impacts real spending

February marked the seventh straight month in which inflation outpaced income, raising doubts about consumer spending stamina, explained analysts at Wells Fargo commenting personal income and spending data released on Thursday.

Even with inflation at a 40-year high, the 0.4% drop in real spending in February might be overstating the burden and be more of a reflection of an upward revision that made January one of the best months on record for real spending.”

Key Quotes:
“The 0.4% drop in real spending in February comes on the heels of an already strong January gain that was revised much higher. In fact the 2.1% monthly jump in real PCE in January was the sixth largest increase in records going back more than 30 years. Of the five months that beat the January increase, four of them were pandemic-related surges tied either to major reopening months or to stimulus payments.”

Diminished purchasing power will weigh on real spending. We do not wish to dismiss this risk, but we see some notable factors helping households today. Households are in decent financial shape and this should not be overlooked. Wage growth has been robust and shows few signs of slowing amid strong demand for labour.

This is beneficial to households even if inflation is currently eating into much of the recent gain. More importantly, households can temporarily rely on their balance sheets. The personal saving rate rose to 6.3% last month, and since this was below the pre-pandemic rate of 7.8%, it implies a decline in ‘excess’ savings.

We expect households to save less in the near term to offset some of the hit to purchasing power from rising inflation. If they don’t, spending could falter more than we presently forecast.

Check Also

Oil Prices Edge Higher Amid Cooling Inflation and Supply Resumptions

Oil prices began the week on a positive note, bolstered by data showing cooling U.S. …