Is Inflation Causing Americans to Stop Spending?

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Perhaps frugality is back.

The American consumer, after seemingly brushing off the Great Recession far faster than expected, seems to be headed back into retreat. And it appears this time not to be the job market that is doing it or the state of the economy, but inflation. So will inflation cause Americans to finally embrace the “new normal,” stop spending and derail the recovery?

On Monday morning, the Bureau of Economic Analysis announced it’s monthly totals for February for personal income and expenditures. Both numbers were up and looked good. That was until you factored in inflation. The BEA releases its own measure of inflation called the Personal Consumption Expenditures Index. It is less well known than the popular Consumer Price Index, but some members of the Federal Reserve think it is a more accurate measure of inflation than the CPI. Well the PCE index rose 0.4% in February, that was the largest monthly increase for that figure in two and a half years.

The result is that when you adjust for inflation, personal income appears to be falling, down 1%. And that strong spending rebound we were seeing a few months ago? Well, again adjust for inflation, and that seems to be disappearing as well. Here’s what the popular economics blog Calculated Risk had to say (note when economists say “real” that means they are adjusting for inflation):

Even though PCE growth was at expectations, real PCE was low – and this suggests analysts will downgrade their forecasts for Q1 GDP. Using the two month estimate for PCE growth (averaging the growth of January and February over the first two months of the previous quarter) suggests PCE growth of around 1.4% in Q1 (down sharply from 4.0% in Q4).

So is inflation the thing that will get consumers to finally close their wallets? The thing is inflation is actually a two-edged sword when it comes to consumption. When inflation rises quickly, that can hurt confidence in the economy and as long as prices are rising faster than incomes (which usually happens when inflation really takes off) that can cause people to conserve their dollars. But if inflation is too low, that can hurt spending as well.

Here’s the thing: Inflation is part of recoveries. As the economy starts to grow faster, that boosts demand and with it prices tend to rise as well. This happens in every recovery. And it is a hump that every recovery has to get over. If prices start to rise faster than the economy, then recoveries fail. But that doesn’t usually happen. This time around the usually weak job growth has people concerned that rising prices will overtake the recovery. For now that doesn’t look likely. Even with February’s 0.4% jump in inflation as measured by the PCE, prices are still only up 1.6% in the past 12 months. (And that is actually less than the CPI’s jump in the past month of 2.1%.) Real GDP, by comparison, rose nearly 3% in 2010. So, for now, inflation seems unlikely to derail the recovery. But if prices continue to rise like they did in February we might have a problem. Stay tuned.

http://metagearsolid.wordpress.com metagear

Inflation may be part of recoveries incidentally, but why hide the real reason? Don’t say it has anything to do with demand, that’s just a silly.

Inflation isn’t rising prices, inflation is the drop in value of the dollar because there’s more of it in circulation! There’s no logical connection there, so why mislead? The reason why recoveries pump new money into the system (and thus produce inflation) is because money is created out of thin air every time a loan is made! It’s not widely taught, but you can look it up.

When people take out loans, they’re not borrowing existing money that’s been deposited — they’re generating inflation. The government does the same thing every time they go to the Federal Reserve for a couple billion dollars. That money directly creates inflation.

So when prices go up, it’s not because of demand, it’s because the dollar is becoming more worthless, while the real cost of things stays the same.
waynebernard

Fortunately, as the Fed keeps telling us, there is no inflation!

Here’s what one of the Federal Reserve’s central bankers had to say about the new iPad 2 in relation to inflationary pressures in the economy:

http://viableopposition.blogspot.com/2011/03/advice-from-federal-reserve-save.html

Better buy an iPad 2 – you get twice the computing power for the same money and it helps negate the pain of higher food and fuel prices!
Dirk

You are right that borrowing, in a system that only requires to keep a fraction of deposits as a safety cushion, will create inflation.

If demand rises, more people and companies will use their spare cash, or take out loans, increasing the money supply in that way.

Yes, more demand can create inflation if there aren’t many unused ressources (metals, people, factories, …). That being said, this remains true: it’s because the dollar is becoming more worthless, while the real cost of things stays the same. That is actually the definition of inflation.

And for those who are saying that inflation in underestimated: the Fed will look at all goods and services in the economy. Food and gas has gone up a lot, and this will disproportionally hit the poorer/working class. But wages do not go up fast, and productivity is rising. These factors will lower inflation, even if you don’t see it.
http://nakedempire.wordpress.com nakedempire

US Farmers switching from food crops to Cotton…..watch out FOOD INFLATION…..

http://nakedempire2.blogspot.com/
josephmateus

You guys are absolutely right, metagear and Dirk ! it is most refreshing to see knowledgeable intelligent people like you on the ball here saying it exactly as it is ! Yes, by more than doubling the money supply in the last two years, “helicopter” Ben Bernanke has devaluated the dollar considerably, while the price of goods stays the same. A weaker dollar means people now have to pay more dolars for the same goods > There is the real cause for inflation, and that is INFLATION ITSELF.

And if “helicopter” Ben Bernanke continues on this crazy, wild totally irresponsible course of creating more money out of thin air at will, and adding insult to injury by keep interest rates at a most ridiculous 0, pretty soon we will see hyperinflation, we all will be walking down the road with our pockets full of worthless fiat dollars. Yes, excessive irresponsible money creation is the real cause for inflation, not basic supply and demand.
http://stephenpoo.wordpress.com stephenpoo

This all must be a pourposey planed not by accident,
So what differant policies have to be implemented inorder to stop the press’s?
A large tax increase perhaps?
http://vaengineer.wordpress.com vaengineer

While inflation is ‘part of recoveries’, this time I believe the paradigm is different in that now we are past the age of cheap energy. As the world has peaked in available net energy, every recovery will be buffetted by rising oil and energy costs. This translates to higher food prices, as our agricultural system is steeped in fossil fuel use. We are going forward between a rock and a hard place- recession on one side, and high energy prices on the other. Throwing in a growing world population and growing economies in China and India, and voila! welcome to our new world.