Interest money

Flushed with pandemic tax and tax revenues, states and cities are throwing money away. Congress too. Is it any surprise that consumers spent more than this raging inflation?

The Fed, which is trying to slow demand to curb consumer price inflation, is cringing.

By Wolf Richter for WOLF STREET.

In many ways, it’s still the most overstimulated economy ever, and it doesn’t want to go down because there’s still all that money coming from Fed and government stimulus. So here is an example.

California has so much money right now it doesn’t know what to do with it. It therefore distributes money left and right, including directly to consumers. The state will start sending stimulus checks, I mean inflation checks, in October up to $1,050 per household. In total, about $10 billion should be sent to consumers just in time for the shopping season, and people are going to spend that extra $10 billion.

Other states — and cities — are also overflowing with money and spending it in a million different ways, either directly or by subsidizing one thing or another. And Congress just passed massive freebie legislation that showers businesses and consumers with all kinds of inducements, money, discounts, and more.

And that kind of stuff just keeps going — because states and cities are overflowing with pandemic money and tax revenue money, and they’re going to throw that money at their businesses and their consumers. And Congress still lives in a time when money was free, and it acts like it.

It comes as the Fed attempts to dampen demand by raising interest rates to slow business and consumer buying, to reduce pressure on prices and allow runaway inflation to subside. All of these stimuli still going on on the other side of the equation thwart what the Fed is trying to accomplish. And the Fed cringes.

Is it any surprise, then, that consumers spent with abandon in August, or even outpaced the new spike in runaway inflation? No, it’s not a surprise.

Total consumer spending on goods and servicesadjusted for inflation – therefore “real” consumer spending – increased by 0.1% in August compared to July, and by 1.8% compared to a year ago, to reach a new record, despite rampant inflation.

This is explained by the increase in spending on services (adjusted for inflation), even as spending on goods (adjusted for inflation) continued to fall after the huge surge of mega-stimulus from the last year. Clearly, the Fed’s message about wanting to slow demand has yet to reach consumers:

Service expenses, adjusted for inflation, was up 0.2% for the month and up 3.0% from a year ago. Services include healthcare, housing, education, travel, sporting events, haircuts, repairs, subscriptions, streaming, and more.

Services accounted for 62% of total consumer spending in August, the highest since the pre-pandemic period, but was still below the share of around 64% in normal times, as spending on services is still below trend pre-pandemic; but spending on durable goods, as we will see in a moment, has still not come out of the stimulus bubble.

Expenditure on durable goods, adjusted for inflation, continues to be significantly above the pre-pandemic trend. This is where the most overstimulated economy ever manifested itself in a spending explosion in 2020 and 2021, which is now slowly and reluctantly returning to trend.

Inflation-adjusted spending on vehicles, appliances, electronics, furniture and other durable goods fell 0.4% in August, but that didn’t even reverse the previous month’s jump. Compared to stimulus-driven spending on durable goods last year, August was up 2.9%. Compared to August 2019, expenses (corrected for inflation) increased by 25%, which is still amazing!

Expenditure on non-durable goods, inflation-adjusted, which was also boosted during the stimulus period, is back to pre-pandemic trend and almost there. In August, spending on food, gas, household supplies, etc. were down 0.1% from July and down 2.2% from the level fueled by the stimulus last year. It was still up 9% compared to August 2019 (adjusted for inflation).

It’s now inflation in services, ironically, soaring as durable goods inflation begins to subside. “Ironically” because inflation-adjusted service spending is still well below the pre-pandemic trend. And you would think that would be a tough segment for inflation to take off. But no. Inflation

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