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What Household Savings and ‘Warmer Days’ Ahead Mean for Economic Snapback

U.S. inflation expectations have been on the rise as a vaccine rollout that could see enough doses for every American adult by the end of May has driven up the long-term rates on U.S. Treasuries, pricing in a possibly quicker economic rebound than initially expected.

With many Americans able to work from home, cutting some of the usual commuting expenses, some have put aside money into savings and have deeper pockets to reach into when they are able to head out again. That’s also true for those who had to curtail vacations and travel plans. And after a year of being careful and staying closer to home, Covid fatigue is starting to set in. Consumers want to go out and get back to living their lives.

The Conference Board’s Consumer Confidence Index for February rose to 91.3 from 88.9 in January. Even though the cutoff date for the February report was before last month’s winter storms and the Texas power crisis, the uptick still reflected a change in sentiment after three months of consecutive declines. Stimulus checks from December also helped with the boost in consumer spending power.

A Mastercard SpendingPulse report said U.S. retail sales excluding automotive and gasoline increased 4.6 percent year-over-year when adjusted for the leap year in 2020. Not surprisingly, online sales grew 54.7 percent versus 2020 figures. The grocery sector also saw gains, as did home decor as spending in the category rose 8.6 percent for the period. Apparel sales were down 5.3 percent overall, but purchases online rose 47.3 percent. Of all purchases in the apparel category, 73.9 percent were made online versus 47.5 percent in the same period a year ago.

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“From jewelry to apparel, e-commerce has opened doors for consumers to shop online while warmer days, widespread vaccinations and the loosening of restrictions appear on the horizon,” Steve Sadove, Mastercard senior advisor and former CEO of Saks Inc., said.

As consumers think about heading out, shopping in stores and dining at restaurants again, they might also have to contend with inflationary pressures that could push prices higher.

Wells Fargo senior economist Sarah House says the inflation landscape has reached an “inflection point,” showing higher inflation due to supply constraints and expectations for a demand spike in some categories later this year.

“We’re coming out of this downturn in a very different position when it comes to inflation I think than we’ve seen in a long, long time. So, there are signs of higher inflation across multiple, multiple dimensions. But, at the same time, there’s still a lot of uncertainty about just how high inflation might go and also for how long,” she said.

Noting a surge in short-term inflation expectations, approaching levels not seen in more than a decade, House said the longer-term outlook for inflation expectations beyond five years has reached 2014 levels.

“So, still within its historic range, but definitely is higher [than what it has been] over the last couple of years,” House said.

A broad increase in input prices, bottlenecks in the goods sector and in terms of production have all contributed to the rise in costs. That’s been exacerbated by issues within transportation networks and staffing challenges due to the pandemic. The result is higher input costs, backlogs growing and longer delivery times. And with an expected surge in demand from consumers, that translates to a lot of money chasing too few goods.

Households are estimated to have accumulated $1.7 trillion in savings. “By probably spring, early summer, that could rise to about $2.5 trillion, even as we see consumer spending grow at a double-digit pace in both the second and third quarter,” House said, noting during a “U.S. inflation Outlook” webinar that the findings are typical of a post-recessionary period.

Shannon Seery, also a Wells Fargo economist, said in the same webinar that below-trend categories could take two years to get back on track. If core CPI rises slightly over 2 percent for the next 12 months, or even 2.3 percent, that would translate to a relatively tame inflation rate since it’s only moderately exceeding the Federal Reserves’s 2 percent target rate, she said. Core CPI is the Consumer Price Index for Urban Consumers, an aggregate of prices paid for a typical basket of goods and services, excluding food and energy.

But if CPI hits closer to 3 percent, that’s historically a high rate and higher than the Fed target, which could test its current mandate of keeping interest rates low.

“In terms of higher input costs we’re seeing today, there’s definitely evidence of businesses feeling that price pressure and considering passing that on to consumers,” Seery said. Consumers increasingly expect prices may rise, leading perhaps to a self-fulfilling prophecy as many believe that they’re more willing to accept higher prices now than they have been within the past decade.