Budget-Strapped Consumers Are Driving Down Inflation

Consumers often see themselves as victims of economic forces. But they have more power than individuals realize. First, 69% of GDP is consumer spending. Without individuals living their lives — and paying their bills — there wouldn’t be much of any economic growth to discuss.

Furthermore, consumers at odds with years of inflation higher than they have come to expect are pushing for cheaper alternatives, returning to a pre-pandemic sensibility and effectively pulling the reins in on corporations who have to keep them happy.

“While inflation is down, prices are still high, and I think consumers have gotten to the point where they’re just not accepting it,” Tom Barkin, president of the Federal Reserve Bank of Richmond, said last week at a conference of business economists, according to the Associated Press. “And that’s what you want: The solution to high prices is high prices.”

Concerns about slowdowns in consumer spending began to show up in April and May 2024. The BEA’s personal incomes and outlays report for April 2024, released on May 31, 2024, was not pleasing in real terms — that is, after the effects of inflation. Real disposable personal income (DPI) and real personal consumption expenditures (PCE) were down 0.1% in April from March.

Measures improved in May when real DPI grew 0.3% over April, but growth dropped to 0.1% in June. Real PCE was up 0.4% between April and May and then down to 0.2% month-over-month growth in June.

By July, concerns heightened again. Retail sales growth was stagnant. Spence Mehl, partner at RCS Real Estate Advisors, who focuses on clients in the retail sector, said some struggles are coming mainly for non-luxury players. Macy’s, for example, posted net sales of just $4.8 billion in the first quarter, a 2.7 percent dip year-over-year. “Discount retailers like Ross, Burlington and TJ Maxx have all been aggressively expanding,” Mehl told GlobeSt at the time.

Companies including Amazon, Disney, and Yum Brands said consumers are either looking for bargains or avoiding goods and services they think are too expensive, as AP said. Instead of a rapid retrenchment that could bring on a recession, they instead seem to be returning to pre-pandemic behavior “when most companies felt they couldn’t raise prices very much without losing business.”

More evidence will appear on Wednesday in the form of the July Consumer Price Index. The Dow Jones survey of economists shows a median projection of 0.2% core CPI growth over the previous month and annual growth of 3.2%, down slightly from last month’s 3.3%.

A slight uptick in inflation is unlikely to prevent a rate cut in September, Bloomberg noted. Consumer pressure on companies had resulted in “recent easing of price pressures,” they say has strengthened Fed confidence to reduce the fed funds rate.