Consumer spending growth continues to be resilient despite inflation's negative impact on purchasing power and sentiment.
In August, personal consumption expenditures increased by 0.4% month over month. They were up 0.1% when adjusted for inflation.
It is simple: Consumers have money.
The extra cash consumers have been sitting on a mountain of excess savings because of the government financial support and limited spending options during the epidemic, which is a result of wage increases compounded by persistent job growth. It is worth noting that this is in excess of what would have been saved assuming the pre-COVID rate of saving.
During this period, consumers had accumulated as much as $2.1 trillion in excess savings, according to Wells Fargo. That is a lot of extra spending power in an economy with $25 trillion in annual GDP.
Savings are rapidly falling due to high inflation. Wells Fargo estimated excess savings fell to $1.3 trillion as of August.
This extra cash is a godsend for a lot of consumers who have been slammed by inflation.
It looks like consumers have been eating into the excess savings that has been built up over the earlier stages of the epidemic to fuel recent spending, JPMorgan economists wrote on Friday.
It is great news for businesses selling goods and services to these consumers.
These strong finances are helping to prevent an economic downturn from becoming a calamity.
The Federal Reserve is trying to cool off by slowing demand in the economy, which may cause excess savings to be exacerbating inflation. If consumers can afford to pay higher prices, then businesses won't have much incentive to cut prices, thus keeping inflation high.
It is with mixed emotions that we watch excess savings dwindle. On the other hand, it means consumers will have a harder time paying for what they need. This pain is exactly what the Fed is expecting to bring prices down.
It looks like consumers still have a lot of excess savings to tap into, which will prevent prices from cooling faster.
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