Understanding the Impact of US Consumer Spending on the Economy

Understanding the Impact of US Consumer Spending on the Economy

As the United States continues to grapple with the impact of COVID-19, the country's economy has been in a state of flux. In particular, the level of consumer spending has been a key factor in determining the overall health of the economy. In this blog post, we will explore the recent surge in consumer spending in the US, its impact on the economy, and what it means for inflation and interest rates.

Consumer Spending in the US

Consumer spending in the US is a critical component of the country's economy. In fact, it accounts for nearly 70% of the entire economy. Therefore, when consumer spending is high, it can contribute significantly to the expansion of gross domestic product (GDP) and boost the overall economic growth rate.

In January 2022, the US Department of Commerce announced that personal consumption expenditure (PCE) had increased by a staggering 1.8% compared to the previous month. This surge in consumer spending was a marked increase from the previous two months, during which consumer spending had declined by 0.1% and 0.2% in December and November, respectively.

This recent surge in consumer spending was largely driven by a corresponding increase in retail sales, which account for around 30% of consumer spending. Retail sales had already recorded a monthly increase of 3.0% in December, suggesting that a surge in PCE was on the horizon.

The Impact of Consumer Spending on the Economy

As noted above, consumer spending is a crucial driver of economic growth in the US. When consumer spending is high, it can lead to an expansion of GDP and a boost to the overall growth rate. However, excessive consumption can also lead to inflation.

As consumer spending has surged in recent months, there is a growing concern that inflation could become a problem. The US Federal Reserve (Fed) closely monitors the annual rate of change of the PCE price index as an indicator of inflation, rather than the consumer price index (CPI) which is more commonly used.

In January 2022, the PCE price index rose by 0.6% month over month, far exceeding the 0.2% rise in the previous month. Furthermore, the annual rate of change compared to the same period last year recorded 5.4%, up from 5.3% in the previous month. This indicates that PCE inflation, which had fallen for six months in a row after peaking at 6.8% in June of 2021, is once again on the rise.

When inflation is on the rise, the Fed may need to take measures to contain it. One such measure is to raise interest rates. However, with consumer spending surging and inflation once again on the rise, it is unclear whether the Fed will raise interest rates at its policy meeting in March.

The Role of the Core PCE Price Index

The Fed's 2% inflation target refers to the annual growth rate of the core PCE price index. This index excludes the highly volatile energy and food sectors, providing a more stable indicator of inflation.

In January 2022, the core PCE price index rose by 0.6% month over month, up from 0.4% the previous month. On an annual basis, the core PCE price index rose by 4.7%, turning upward for the first time in six months. This is another indicator that inflation may be becoming a problem in the US economy.

Conclusion

Consumer spending is a critical driver of economic growth in the United States. While a surge in consumer spending can lead to an expansion of GDP and an increase in the overall growth rate, excessive consumption can also lead to inflation. As consumer spending has