Dual Punches of Inflation, Russian Attack Trigger Consumer Spending Slowdown

consumer spending, commerce department, inflation, russia, ukraine

With the dual punches of runaway inflation and the ongoing Russian attack on Ukraine, consumer spending in February went up at a slower pace of 0.2%, down from a revised 2.7% increase in January, according to the Thursday (March 31) report from the U.S. Commerce Department. 

Consumer spending accounts for more than two-thirds of U.S. economic activity. Personal income increased by 0.5% in February over January, which was largely flat. 

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Annual inflation, meanwhile, surged to 6.4% in February, using the department’s personal-consumption expenditures price index, which is the preferred gauge of the Federal Reserve. 

Annual core PCE inflation — minus food and energy prices — went up to 5.4% last month. The core PCE price index increased 5.2% in the 12 months through January. Inflation is at its highest level since the 1980s.

Spending on goods dropped, according to the report, marked by declining purchases of motor vehicles as well reduced spending by consumers on food, household furnishings, recreational goods and clothing. Spending on gasoline went up by $27.1 billion last month.

With infections from COVID-19 and related variants largely fading into the background, spending on indoor restaurant meals and travel went up 0.9% in February over January. 

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The savings rate climbed to 6.3% from 6.1% in January. Weekly jobless claims increased by 14,000 to 202,000. 

Bank of America economist Alex Lin told the Wall Street Journal that robust demand from consumers is keeping prices up since businesses haven’t yet seen a reduction in pricing power. That could change, however, especially if consumers start running out of savings and inflation continues going up.

Kim Cook, the owner of the Kansas business Love to Travel, told WSJ that her customers are booking trips despite high airline ticket prices and hotel costs. 

“They say, ‘I know it’s going to be pricey, but we haven’t been anywhere in two years, we really want to do this,’” Cook said. After building up savings during the pandemic, “they’ve got the money to burn.”