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Consumers are the next transitory guessing game

Central bankers and investors spent the latter part of last year debating whether U.S. inflation was transitory. As it turns out, it wasn’t. The same question could now apply to the health of the American consumer – who is increasingly glum but somehow still spending.

Surging prices have undoubtedly made a dent in households’ mood. Consumer sentiment has generally fallen this year: the Index of Consumer Sentiment produced by the University of Michigan dropped 10.4% in May from the previous month. Yet the Commerce Department said on Friday that consumer spending rose 0.9% in April from the previous month, surpassing economic estimates reported by Reuters. Bills at restaurants and bars surged 20% last month compared to a year ago.

Meanwhile, companies that serve consumers are having a tough time, but not necessarily because of the customers themselves. Walmart and Target had solid sales in the first months of the year but their profitability was dragged down by increasing transportation costs and other expenses. They, along with Amazon.com were upbeat about future sales.

Of course, consumers come in different types and different income brackets. Lower-income households are being hit harder, judging by the rising demand for cheaper, private-label goods at Walmart as food prices increased. Budget retailer Dollar General reported similar trends on Thursday, and raised its full-year same-store sales forecast to 3.5%, from 2.5%. But the well-off seem insulated. LVMH which owns Tiffany and Louis Vuitton, said revenue jumped 26% in the United States.

Managing these mixed signals may be problematic for Federal Reserve Chair Jay Powell. The central bank has signaled rate hikes of 0.5 percentage points for the next few meetings, instead of bigger increases that could tame inflation faster. Eager shoppers could throw that plan off by sending costs higher, along with food supply shortages and Covid-19 lockdowns in China.

American savings rate has fallen this year as stimulus funds dwindle. But inflation slowed for the first time in months to a bump of 0.2% in April from March – albeit still close to a 40-year high – while wage growth was higher at 0.4%. The lesson from 2022 so far has been that rising costs weren’t fleeting after all. There’s still room to hope that consumer spending isn’t either. Reuters

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