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Inflation can cause a recession if incomes and spending fall below the rate of price increases.
Why it matters: With the highest inflation we’ve had in decades, this is a real threat. However, American consumers keep spending above inflation, which is a hopeful sign we can avoid a recession in the near term.
By the numbers: According to the Bureau of Economic Analysis, in April:
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- Inflation was up 0.2% from March and 6.3% annually
- Income rose 0.4% or 0.2% adjusted for inflation
- Wages and salaries rose 0.6%; 0.4% adjusted for inflation
- Spending rose 0.9%; 0.7% adjusted for inflation
- Savings fell almost 12%. The personal savings rate is the lowest in 13 years.
Be smart: Consumers can keep ahead of inflation because wages and salaries grew more than inflation and because they are spending down their savings.
- They can stay ahead of inflation for the next few months if wages continue to grow because they still have a reservoir of savings to draw from. Despite the savings rate dropping each month this year, there is still well over $2 trillion in excess savings from March of 2020 for consumers to spend down.
Bottom line: While this situation can’t last forever if high inflation persists, it can keep us out of recession for a while.
Go deeper:
—Curtis Dubay, Senior Economist, U.S. Chamber of Commerce
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