US: Consumers have the money, they are just not spending that quickly – Wells Fargo

Data released on Friday showed an increase in personal income of 1.1% in July and in consumer spending of 0.3%. Analysts at Wells Fargo, warn that inflation grew even faster than consumer spending as evidenced by the 0.4% monthly increase in the PCE deflator. 

Key Quotes: 

“With a gain of just 0.3% in July, personal consumption is not even keeping pace with inflation. After accounting for a 0.4% pop in the PCE deflator—the Fed's preferred inflation gauge—the real spending change was a decline of 0.1%.”

“Transitory or not, if inflation continues to outpace spending growth, it will become increasingly difficult for the Fed to favor its employment mandate if it means the consumer's purchasing power is being eaten away by higher prices.”

“Consumers have the money, they are just not spending that quickly. There is no telling for sure whether this is due to inflation concerns or worries about the Delta variant, but we look at the clues in the spending figures to make an educated guess.”

“There was notable strength in our 'discretionary' spending categories (Transportation, Recreation and Food Services), which rose another 2.8% in July and now remain 'just' 4.6% below pre-pandemic levels. The details suggest inflation worries are weighing more on goods outlays, where price gains have been the strongest. Continued strength in services spending means COVID is only partially holding back activity.”

“Looking ahead, our high-frequency consumer dashboard is showing mixed signals for August. New daily COVID case counts really started to pick up again in late July and fiscal stimulus is fading.”