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Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute.
The robust pace of U.S. consumer spending looks at first glance like evidence that inflation isn’t hurting a resilient U.S. economy. And that’s how Tuesday’s government report on strong October retail sales growth has widely been interpreted.
Look harder, though, and a more ominous omen appears: one of inflationary psychology becoming entrenched and the risk of an inflationary spiral so intense it would require a damaging recession to correct.
Data from the Commerce Department show that retail sales increased by 1.7 percent in October, beating forecasts. The gains topped those in September and August, even as consumer prices rose the fastest in 31 years. October’s spending gains were the largest since March.
So far, so good. Consumers have money and they’re spending it. That looks like prosperity, not a portent of doom. Quarterly reports from Walmart Inc. and Home Depot Inc. show earnings beating Wall Street’s expectations. Walmart is even planning for inflation’s retreat.
Not so fast. Part of the reason sales boomed appears to be that households did more Christmas shopping than usual in October.
More on that in a moment. First, look under the hood of the Commerce Department’s spending report. Not everything went up. Outlays at health and personal-care stores actually dropped, by 0.6 percent. Consumers spent 0.7 percent less on clothing and accessories in October than in September. Restaurant spending was flat over the month.
That’s the kind of behavior that inflation can usually be expected to generate. If restaurant meals and clothing cost more, people are likely to buy less of them, and in October, that’s what happened.
And that in turn is consistent with data released last week showing that consumers are gloomy. According to the University of Michigan’s Consumer Sentiment index, fear of inflation is growing. Consumers expect prices to rise by nearly 5 percent over the next year. According to the survey, one in four consumers said their living standards were reduced in November due to inflation.
But rising prices and souring sentiment did not dampen all the components of consumer spending last month. Spending at department stores was up 2.2 percent relative to the prior month. Sales at online and mail-order retailers grew by 4 percent percent and at other retailers by 2.8 percent. Electronics and appliance stores saw sales surge by 3.8 percent in October after falling for the prior three months.
What do department stores, online retailers and electronic stores have in common? They are typical venues for Christmas shopping. But Christmas shopping in October is unusually early.
It may be that consumers are less worried about price increases than supply chain disruptions that could make it difficult for them to purchase holiday gifts. Maybe restaurants just can’t boom as long as the pandemic makes people fearful of indoor crowds.
But inflation is surely a concern. As long as consumers worry that gifts will become more expensive as December approaches, the tentacles of inflation are stretching into the consumer psyche.
Inflation isn’t necessarily a menace. Rising prices provide grease for the economy as long as they grow slowly enough so that consumers and businesses don’t have to pay much attention. But if the anticipated difference between October’s prices and December’s prices is enough to motivate people to head to the department store for Christmas gifts, then inflation is troublingly conspicuous.
The more entrenched concerns about inflation become, the more dangerous they are to the economy. Anticipating higher prices, workers might demand higher wages. The rising cost of materials and equipment leads firms to raise their prices. Because firms buy from each other, higher prices charged by some firms mean even higher prices for others. This leads to higher consumer prices, and greater demand from workers for even higher wages.
An inflationary spiral would have taken hold in which businesses increase the prices they charge because they expect that the prices they face will continue to go up. A self-fulfilling cycle is created that would probably require a recession to correct and reset, throwing millions out of work, reducing incomes and harming typical workers and households in myriad ways.
Of course, October’s spending data don’t prove that inflation is spiraling out of control. But they are one more reason to be concerned.