Inflation: Consumers 'are noticeably getting hit' despite savings cushion, economist says
PGIM Fixed Income Lead Economist Ellen Gaske joins Yahoo Finance Live to discuss inflation, consumer spending, recessionary risks, and the state of the economy.
Video Transcript
- Let's get back to that inflation read that Brian was pointing to, and bring in PGIM fixed income lead economist, Ellen Gaske. Ellen, it's good to talk to you today. Let me just first get your read on this. We were talking about it earlier. Have we reached the peak? How do we read the data we got today?
ELLEN GASKE: Right. So we've been seeing a notable slowdown in economic activity this year, a broad based slowdown. GDP estimates for this year keep coming down. The consumer emerged from COVID crisis in great shape. We had expected spending to begin to moderate after the peak during the reopenings, but this year actually the consumer has turned out to be weaker than anticipated.
First quarter, the consumer spending pace was revised lower, from 3% down to 1.8%. So above trend to something a little bit below trend. And now so far in the second quarter, consumer spending has been even weaker. Last month declining more than expected.
BRIAN CHEUNG: Ellen, it's Brian Cheung here. I wanted to ask, I guess just on the other side of things, on saving. We actually saw the personal saving rate increase to 5.4%. It's still historically low, and we know that the levels of savings remain high because of the stimulus that was kind of put in place there. But when you see a tick up in the saving rate, does that tell you anything about in tandem with the fact that spending is going down, that Americans are starting to pull back, which could be a positive sign for getting inflation down?
ELLEN GASKE: Yes. I would agree with that. The silver lining of the downward revisions to consumption was that the savings rate actually was revised up by about a percentage point or so. But pre-COVID it had been running 7% to 8%. And, as you said, it's dropped now to 5.4%.
It hasn't dropped to the lows we saw back during the housing boom-- 2% savings rate-- so there is a bit of a cushion there for consumers to stomach, to weather this high inflation. But with the Fed hiking rates, they do mean to dampen that consumption pace. They do mean to tilt the balance towards more savings rather than consuming.
The cost of financing autos, the cost of buying a home, all of that, the interest rate increases significantly, increasing those costs. At the same time, savings offering perhaps a better avenue. So the Fed does mean to tilt that balance. The savings rate does provide a bit more of a cushion, but consumers aren't noticeably getting hit by the high inflation.
Their wages aren't keeping pace. They have been able to keep up nominal spending. But it's coming out showing up in very weak real spending growth.
- So Ellen, what does that say in terms of how the Fed weighs this along with the broader picture you just pointed to, the consumer not getting hit as much? Yesterday we were talking about what we heard from Jay Powell. The markets sort of interpreting that to say, well, maybe the Fed can't move as aggressively as it wanted to, given the dynamics at play.
ELLEN GASKE: So that's been my base case over the last year. That the Fed wouldn't, in fact, be able to hike as much as the Fed's been projecting, and certainly what the market's been expecting. The market pricing has come off a bit in recent weeks.
It's in line with the Fed, expecting that the Fed will indeed hike the funds rate to 3.4% by the end of this year. That's double its current level. But then the Fed has a couple of more hikes penciled in for next year. The markets aren't buying that any more. The markets have it peaking at 3.4%. And, in fact, the Fed likely cutting by next year.
We saw pre-COVID that a Fed funds rate at about 1.75%, which is where it stands right now, that seemed to be about what the economy could sustainably absorb. So my own view is that any further hikes from here is a hike into restrictive territory. We've seen interest sensitive sectors really respond to the higher rates. Housing has unwound the surge. We saw it during the two years of COVID.
Auto sales are depressed, durable goods spending is moderating. We're seeing a reaction of the economy. With a lag, I'm expecting prices to follow suit. We are seeing some softening of some pockets of price pressures softening. And I expect it will have an impact.
BRIAN CHEUNG: Yeah. And perhaps the doubt in the markets is the reason why we've seen the 10 year actually falling actually about 300 basis points right now. IGIM fixed income lead economist Ellen Gaske, thanks so much for breaking all that down for us.
