Prices increased by 3.6 percent in April compared to the previous year, continuing a trend of rising inflation, though economic policymakers say the increases are temporary.
The Bureau of Economic Analysis reported on Friday that prices rose 0.6 percent in the previous month. However, after adjusting for inflation, consumer spending fell 0.1 percent in April compared to March, as the economy’s stimulus began to fade.
The latest inflation figures are unlikely to frighten the Federal Reserve, which is responsible for keeping prices stable and unemployment low. For months, Fed officials have argued that any increase in inflation will be temporary, and that prices will fall as the economy recovers from the pandemic. Rather than raising interest rates and slowing the recovery, the Fed is urging patience so that the labor market can heal.
After adjusting for inflation, Americans’ after-tax income fell 15.1 percent in April from a record high in March, when hundreds of billions of dollars in stimulus payments boosted U.S. bank accounts. Income increased by an astounding 22.7 percent in March compared to February. So, while after-tax income fell in April, it has been trending higher in the long run, as stimulus checks and unemployment benefits continued to arrive in April, albeit at lower levels.
After adjusting for inflation, consumer spending recovered completely from the Covid crisis in March, thanks in part to this government-assisted income surge. Consumers account for nearly 70% of the US economy, and their spending whims have long driven US economic growth.
However, while consumers are finally spending the same amount per month as they did before the recession, spending in April 2021 looks very different from spending just 14 months earlier, before the crisis. Spending on goods — everything from private planes to window panes — recovered quickly and has been at an all-time high ever since.
Spending on services, such as parking fees and surgeries, increased 0.6 percent in April compared to the previous month, but remained 4.7 percent below pre-pandemic levels as the virus’s fear remains widespread and some high-traffic brick-and-mortar businesses struggle to regain their footing.
Nonetheless, there are reasons to be optimistic. The gradual shift back toward services spending, according to Julia Coronado, president of Macropolicy Perspectives and a former Fed economist, will help the economy regain its footing. Workers in the service sector will continue to be hired, and pressure on the “overheated goods sector,” where supply chain backlogs have resulted in higher prices, will ease.
The consumer price index, which was released earlier this month, is based on a survey of what households buy, whereas the figures released on Friday are based on surveys of what businesses sell. Furthermore, the consumer price index only captures out-of-pocket expenses and does not account for costs that are not directly paid for, such as medical care covered by insurance or Medicaid. These costs would be included in the data released on Friday.
The rise in both indexes can be attributed in part to their point of comparison: Prices and spending fell last April as the country went into lockdown due to the novel coronavirus. Economists say that in comparison to that unusual low, this April’s numbers appear unusually high.
Fed Chair Jerome H. Powell and others explain why inflation is on the rise and why the Fed isn’t concerned about bringing it down too soon. Consumer demand for goods and services, such as airline tickets and restaurant reservations, is increasing as people spend their pent-up savings. Meanwhile, the supply side of the equation is lagging behind. These bottlenecks are expected to ease as factories return to full capacity and workers return to the workforce. But it won’t happen overnight.
Economists also expect inflation figures to fall in the coming year as the super-low readings from the pandemic’s early days are removed from the equation.
In addition, the Biden administration anticipates that inflation will rise in the coming months before settling to more sustainable levels. Treasury Secretary Janet Yellen stated on Thursday that “as the economy gets back online, it will be a bumpy process.”