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With consumer price inflation reaching new heights in March (8.5% year over year), there continues to be much media and newswire discussion on the impact of inflation on buyers – particularly those on low or modest incomes. Media stories sometimes cite surveys of sentiment that show consumers are inclined to cut back in response to higher prices.
But people don’t always do what they say or want to do – sentiment is not the same as action. Fortunately, the hard data doesn’t support all the gloom. In short, despite clear signs of inflation, there are some good reasons to be cheerful about the economy.
1. Bank of America card spending was strong in March and is looking good in April
Bank of America propriety data showed solid 11% YoY card spending in March. And in the very latest data we are seeing this strength continuing into April, with solid growth in card spending and even stronger growth in other payment channels. Net: No sign of recession here.
2. The labor market is stronger than it appears for low-income groups. While inflation is strong so is employment and labor income. The overall US labor market looks strong, with the unemployment rate dropping to 3.6% in March and hourly wage growth at 5.6% YoY. But beneath this already rosy picture, the story is even better at the lower end of the wage distribution.
3. Cash in the Bank. Lower-income households appear to still have substantially higher deposit balances relative to pre-pandemic periods. When we look at savings and checking balances of households with incomes below $50K, we find they have at least $1,500 more than at the start of 2019. To put that in perspective, this figure is more than 5% of this income group’s average household spending in 2019. So, Bank of America does not find it too surprising that this group is not reacting as adversely in their card spending data to higher prices as one might assume from reading media stories.
4. Card spending shows momentum with robust consumer spending spanning all income groups. We see prices rising in key areas:
a. Spending on leisure is back. Bank of America credit and debit card spending has rebounded strongly in travel and leisure activities since the ebbing of the omicron wave. Airline spending was 91% higher YoY, while restaurant spending rose by 17%. Spending on leisure appears to be normalizing, after a long period during the pandemic when spending on goods was favored over that on services.b. Card spending on gasoline was 41% higher than the same period a year earlier. The surge in global oil prices is most of the story here and, even though oil prices have dropped back of late, the ongoing war in Ukraine is keeping them high. At the end of March, weekly retail gasoline prices (all grades) had risen to $4.34 a gallon, a full 96 cents higher than where they started the year.c. Food prices are rising sharply. Food price inflation has also been rising sharply, with annual inflation for food at 7.9% in February. Geopolitics is a factor here too, with soft commodity prices rising sharply on world markets this year. For example, wheat prices, where Ukraine is a major exporter, are around 30% higher than at the start of the year.
We thank the team at Bank of America for their terrific insights and information. For additional reading, check out the articles below.
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