US consumers boost spending in April as inflation rate surges

Americans increased their spending by 0.5% in April, a slowdown after a massive gain in March that had been powered by the distribution of billions of dollars in individual stimulus checks.

Even with the pullback from a 4.7% surge in spending in March, the April increase provided further evidence that consumers are driving a strengthening recovery from the pandemic recession. The April gain was led by a 1.1% rise in spending on services, the sector that covers airline travel, hotels and restaurants - areas that were devastated by the pandemic-caused shutdowns a year ago.

Friday’s report also showed that inflation by a measure preferred by the Federal Reserve surged by a bigger-than-expected 3.6% for the 12 months that ended in April. Even excluding the volatile food and energy categories, the so-called core inflation over that period was a still high 3.1%.

Both figures are far above the Fed’s 2% annual inflation target. Yet the current year-over-year inflation figures are likely temporarily elevated. That’s because when the pandemic paralyzed the economy in early spring last year, many prices plummeted before rebounding later in the year. That factor at least partly explains why the 12-month inflation figures look so large. They are expected to ease in the coming months, although inflation pressures have been surfacing in the prices of many goods and components - a result, in most cases, of supply shortages.

In its report Friday on consumer spending in April, the government said that goods purchases fell 0.6%. To some economists, this suggested that consumers have embarked on a long-anticipated shift away from the large goods purchases many of them had made while hunkered down at home to spending on services, from haircuts to airline tickets to restaurant meals. “The great consumer spending rotation to services has begun,” said Gregory Daco, chief US economist at Oxford Economics. “As health conditions continue to improve and the economy reopens, generous fiscal stimulus, rebounding employment and rising optimism will help unleash pent-up demand.” Daco forecast that consumer spending, the main driver of the US economy, could grow this year by around 9.5%. If so, that would amount to the strongest such showing since 1946, when the nation was emerging from World War II rationing and other restrictions.

Friday’s report from the Commerce Department also showed that personal incomes, which provide the fuel for spending, tumbled 13.1% in April. But the drop in income was expected, having followed a record 20.9% income gain in March that reflected the billions in one-time checks to most adults.

The April gain in consumer spending, slight as it was compared with March, supported the view that the economy is rebounding rapidly as individuals and businesses grow increasingly confident enough to spend, hire and invest. On Thursday, the government estimated that the economy grew at a robust 6.4% rate in the January-March quarter, powered in large part by consumer and business spending.