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Inflation and the US consumer

It remains to be seen if consumer demand will persist through the year aided by strong balance sheets and rising wages.

Inflation and the direct impact on consumer spending habits have been top of mind for every investor post the Covid-19 pandemic. To add fuel to the fire, the impact of the war between Russia and Ukraine has directly impacted food and energy prices to a large extent.

A key question for international investors will be how this affects the US consumer. The US economy is likely to be impacted principally by higher food, energy, and commodity prices, which will raise consumer prices, in turn weighing on consumer demand.

Elevated, broad-based, and more persistent inflation has lately reduced real earnings and chipped away at the purchasing power of savings accumulated during the pandemic. It remains to be seen if consumer demand will persist through the year aided by strong balance sheets and rising wages.

Negative views on buying conditions for houses and durables and concerns over inflation pushed the University of Michigan consumer sentiment index to a 10-year low.

US consumer sentiment

 

This extreme negative sentiment can be attributed to uncertainty around inflation as well as single-family home prices reaching an all-time high of US$391 000 per home, raising the cost of living for buyers and renters alike.

Single-family home prices in the US, the median price for single-family and condos (USD)

On the bright side, consumer spending still increased to reach an all-time high of 13 924.80 USD billion in the first quarter of 2022.

US consumer spending (USD Billion)

This was in part aided by rising wages as well as very healthy balance sheets of the US consumer. Wages for the lowest income quartile have risen by more than 6% over the course of the last 12 months.

Consumers were also sitting on record levels of checkable deposits by the end of 2021 which is an indicator of a healthy household balance sheet and could aid in absorbing price increases in the current high inflation environment.

Source: Bank of America

Recent data from the Federal Reserve does however indicate that revolving credit levels are expanding and are back at 2019, pre-Covid levels. This, along with savings as a percentage of disposable income, which has been in decline from mid-2021, does however indicate that the US consumer is starting to feel some of the pinch caused by higher inflation.

What remains to be seen is how long the current inflationary pressure will persist and if the strong US consumer balance sheets are sufficient to weather the storm.

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Franske Neiteler

PSG Wealth Pretoria-East

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