Latest inflation report explained: Americans are over-leveraged, and still spending
The BEA June report shows a 40-year high in PCE index rate, while the worth of minimum wage is at its lowest since 1956
The U.S. Bureau of Economic Analysis (BEA) has released its monthly report, outlining the state of consumer spending in the face of growing inflation. While consumer spending exceeded expectations, the impact of inflation on low-income Americans is increasing.
What the report says:
According to the BEA, the personal consumption expenditures (PCE) price index “is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.”
In June, consumer spending exceeded some experts’ predictions. A Reuters poll showed economists predicting a 0.9% increase in spending, but it increased by 1.1%, or $181.1 billion. Adjusting for inflation (to 2012 rates), personal expenditures only increased by 0.1%.
The PCE price index increased by 1%, almost doubling the 0.6% seen in May. June’s PCE index, compared to last year’s, is 6.8% higher — the difference setting a new 40-year high according to CNN.
Americans' disposable personal income (DPI) increased nominally by 0.7%, but adjusting for inflation reveals the real DPI decreased by 0.3%.
Numbers in context:
Though consumers are spending slightly more than last month, Reuters reports that the young and low-income populations are over-leveraging themselves. Citing a study by the company VantageScore, they found the credit card balances of people ages 25 and younger rose by 30% compared to a year ago, and the balances of people with credit scores below 660 rose by almost 25%.
This rapid inflation could lead to even greater financial strain for these more vulnerable groups. The Economic Policy Institute reports that “the current federal minimum wage of $7.25 per hour is now worth less than at any point since February 1956.” In 1956, the minimum wage was $0.75 an hour.
According to The Washington Post, the small increase in consumer spending coupled with the decrease in personal income has created an unsustainable imbalance. With the strain of this imbalance felt by more and more people, consumer behaviors are likely to change soon. If consumer spending (68% of the country’s GDP) decreases significantly, a recession could follow.