Economic Data Shows Inflation Still Threatens Discretionary Spending

Inflation is cooling, but its stubborn entrenchment is leading consumers to reconsider where and even whether to spend their dollars.

The Bureau of Economic Analysis reported Friday (April 28) that the personal consumption expenditures price index, on a headline basis — including food and energy — was up 0.1%.

On an annual basis, the 4.2% increase represents a slowdown from the 5.1% pace seen in February. But it’s still leagues above the Federal Reserve’s traditionally targeted 2% rate.

And there’s at least some bit of relief in the mix, as energy prices were down 3.7%, and the cost of food was down 0.2%. Spending on food and beverages published for off-site consumption — which includes groceries — was down month over month from $1.325 billion to $1.321 billion. Spending on clothing and footwear through the same period slipped from $502.4 billion to $497 billion. Spending on housing and utilities was up a bit, from $3.154 billion to $3.188 billion.

Separate data relaying personal income showed that disposable personal income was up 0.4%, and personal saving as a percentage of income was 5.1%.

In at least some cases, the surge in high-yield savings accounts might be spurring consumers to put their money to work. But the incremental money saved, and the increase in disposable income translates into a pullback in spending on at least some non-discretionary items, chiefly tangible goods.

There’s still spending in some areas, as the BEA found that March reflected a $44.9 billion increase in spending for services.

Earnings Commentary Underscores Some Shifts

We’re seeing some evidence of that with recent commentary from earnings season, so far. Amazon noted as much on its most recent quarterly earnings call (where commerce sales were up 3%), as reflected in Chief Financial Officer Brian Olsavsky’s observation that “the uncertain economic environment and ongoing inflationary pressures continue to be a factor, and we believe it’s continuing to drive cautious spending across consumers.”

Consumers, he said, are stretching their budgets and have moderated their spending on discretionary categories, shifting to lower-priced items.

Elsewhere, the shift away from spending on goods and toward services, as noted by the BEA, has been seen in the results from the payments networks. In Visa’s earnings, in the U.S., “payments volume growth ticked down and has remained a similar growth level to the first three weeks of April,” said CFO Vasant Prabhu said. Ticket sizes are declining as inflation moderates, he said.

“You’ve heard various U.S. retailers comment publicly about price cuts,” he told analysts.

The price cuts are being implemented to clear out inventory. But U.S. payments volume growth remains strong in services, particularly travel and entertainment.

PYMNTS data showed that discretionary retailers have already been feeling the pinch as consumers have been pulling back on items that they deem non-essential, or at least reconsidering who their go-to merchants are, and the price points that they’ll accept. Fifty-six percent of U.S. retail shoppers have switched merchants in the name of cost-cutting, and price influences 67% of shoppers’ choice of a large retailer.

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