Inflation is Up, Coincidentally, So is Consumer Spending

While consumer spending held strong in June, inflation is still on the rise. As a matter of fact, a key metric the Federal Reserve bank tracks to gauge inflation jumped 6.8 percent last month.  This is the biggest annual increase in at least forty years.

Alas, government figures from the last week of July fortify the idea that persistent inflation is as strong as ever. But while that typically complicates everyday life for the average consumer in America, higher prices are not necessarily deterring purchasing.  Indeed, consumer sentiment may be down but that is not stopping Americans from spending right now.

Of course, this is peak summer travel season in the United States, so it is not too surprising that people are spending money.  Wether people are going on vacation or taking more local excursions, Americans are spending despite skyrocketing inflation.

As a matter of fact, a second government report—also released the final week of July—hints that the economy remains in quite the inflation stranglehold.  The measure of private employee wages is up 1.4 percent for the quarter ending in June, which matches the record high posted last fall.  Higher wages, of course, can fuel inflation concerns as companies pass this expense on to customers in the form of higher prices.

Unfortunately, passing the buck to the customer is typical of industry in corporate America.

Now, the Fed closely monitors this second report—which is known as the Employment Cost Index—becuase it takes into account various decisions that affect interest rates.  If the consequence of the sharp increase last fall is any indication, the Fed’s policy will likely tighten on credit as it has before.

If these factors weren’t enough, the government also reported that consumer spending has actually outpaced inflation over the last 30 days.  Sure, the jump is only 0.1 percent from May to June (adjusting for other price changes).  But since consumer spending is the main driver of the US economy, and inflation typically discourages spending, the fact that the metric is up at all shows that demand for hotel stays and restaurant outings is stronger than the weaker overall sentiment.