Disrupted supply chains mean a wide range of products are not readily available. Inflationary forces mean that even if products are available, they cost way more. People express diminished consumer confidence, worried about their jobs and livelihoods. All these features seem to predict diminished spending. Right?
Wrong. Rather than following economists’ predictions of a drop in retail spending, consumers increased their spending the latter part of 2021. The reason for the discrepancy, perhaps unsurprisingly, is once more the unprecedented impacts of the COVID-19 pandemic.
That is, despite the rough conditions, consumers who have been limited in their consumption for many months seem determined to make meaningful purchases. The stimulus payments received by U.S. consumers also worked as intended, in the sense that they sparked more spending. Even after the payments stopped, consumers may have had more disposable income, due to some notable increases in wages (on average). Furthermore, improvements in COVID-19 conditions, including growing numbers of vaccinations and decreasing mortality rates, are giving consumers some small reasons to feel hopeful.
Of course, part of the reason for increased spending also reflects a concerning development, namely, the higher prices people are forced to spend. For example, whereas spending on gas rose by 1.8 percent, much of that increase likely was due to the substantial increase in gas prices. In addition, the rising prices of consumer goods appear to be increasing more precipitously than wages, implying that at some point, the greater earnings consumers are experiencing will be unable to keep up with the higher prices they are being forced to pay.
- Considering these increases, what would you predict with regard to consumer spending in the immediate future? What factors in the broader environment seem likely to exert strong effects?
Source: David Harrison, “Retail Sales Rise, Showing Strong Consumer Demand, Higher Inflation,” The Wall Street Journal, October 15, 2021; Justin Lahart, “Heroic American Shoppers Braved High Prices, Low Inventory,” The Wall Street Journal, October 15, 2021; David Harrison, “U.S. Prices, Wages Rise at Fastest Pace in Decades,” The Wall Street Journal, October 29, 2021