US inflation - Why isn't spending slowing?

Going by official statistics, the US bureau of labor released a year-on-year inflation figure of 8.3% on April 5th, 2022. But the average consumer will tell you prices feel much higher, more like 30-50%. Looking deeper into the data released by Consumer Price Index-April 2022 (bls.gov), we can see why people feel this way. Cost of Food was up 10%, Gasoline was up 45%, New vehicles were up 14% and used ones up 23%. Ask anyone at the grocery store, gas station, or restaurant, and they will tell you it’s unbearable. So why aren’t people up in arms? The stores are full of people spending like they all have deep pockets. Why aren’t they holding back or saving? Are people numb?

It may be neither. First of all, most consumers don’t listen to news or economic data. Secondly, there is no tradition of saving in the US because for most people, there was never enough to save. As consumers, we are just doing what we have always done. If we have the money, we will spend it. Thanks to 4.6 trillion dollars in Federal Reserve give aways over the last two years, people are spending because they have the money including increased credit lines from credit card companies. Consumer spending is expected to slow down when the bills start piling up and people are not able to pay for these inflated costs. Collectively, the US consumer’s appetite for consumption is like that of a dinosaur. This will only stop when money starts drying up and jobs become scarce.

This brings us to the Federal Reserve’s view that inflation will balance out because there are plenty of job openings. Over the last few decades, the US Federal Reserve has become increasingly political, not willing to make hard choices that would be unfavorable to the ruling party. Because of this short-sighted decision making, not much can be expected from the Federal Reserve except for their declared policy of slowly increasing interest rates by 0.5%.

On Friday May 3rd, the labor department reported that US employers added 390,000 jobs in May. It has been widely reported that there is shortage of reliable workers, and many new employees are quitting soon after accepting jobs, usually within days or weeks. Arguably, the labor department’s data may be skewed and reality not as bright on this front as it is being reported in official statistics. There are also reports that employers are posting multiple job ads and leaving old ads online. It is fair to say such fake job ads are inflating American jobs data. To make matters worse, this is giving job seekers false information about their net worth and true marketability.

In the US, businesses employ most of the national workforce. All businesses are being hit with three challenges — increased wage costs, higher raw materials costs, and disruption in their supply chains. Basic fundamentals of business tell us these challenges will lead to businesses cutting back on production, services, and sales. Increased wage costs, whether by regulation or seismic shifts in the labor market, coupled with global geo-political events are resulting in a stubborn and punishing inflation. Employers are fast adapting to this atmosphere by reducing workforce, changing procedures, reducing hours, not accepting as much business, and installing automation. Many positions in small and medium businesses are being rapidly phased out, eliminated, or just left un-filled. Over the next 6-12 months, there will likely be a progressive increase in job eliminations resulting in money drying up for consumers and drastically slowing down consumption.

US inflation Rate since January 2021.

	Date	US Inflation Rate	US Debt Increase $ Billion	Brent Crude Oil Price $/barrel
Total Change	Since Jan 2021	7.66%	2821	$ 64.53
	30-Jun-22	9.06%	69	$ 119.78
	31-May-22	8.58%	125	$ 125.53
	30-Apr-22	8.26%	-27	$ 108.36
	31-Mar-22	8.54%	111	$ 107.29
	28-Feb-22	7.87%	278	$ 110.93
	31-Jan-22	7.48%	395	$ 92.35
	31-Dec-21	7.04%	709	$ 77.24
	30-Nov-21	6.81%	-1	$ 70.86
	31-Oct-21	6.22%	480	$ 83.10
	30-Sep-21	5.39%	2	$ 77.81
	31-Aug-21	5.25%	-1	$ 73.41
	31-Jul-21	5.37%	-101	$ 77.72
	30-Jun-21	5.39%	331	$ 76.94
	31-May-21	4.99%	25	$ 69.36
	30-Apr-21	4.16%	42	$ 67.73
	31-Mar-21	2.62%	230	$ 63.52
	28-Feb-21	1.68%	118	$ 65.86
	31-Jan-21	1.40%	36	$ 55.25

Inflation data from US Bureau of Labor Statistics https://www.bls.gov/cpi
Brent data from macrotrends.net
US Deficit data from https://fiscaldata.treasury.gov/