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More Travel, Spending Even as US Inflation Ticks Up: Week Ahead

Experts see a surge in social gatherings and road trips nationwide over the long Memorial Day weekend, and consumer spending is expected to hold up despite an inflation indicator rising 3.1 percent in April over year-ago levels.

Equity analysts at Bank of America Securities believe the holiday weekend should restore “normal” consumer behavior, including barbecues, pool parties and short-distance trips. In a research note issued on Friday, analysts cited Levi’s, Revolve and Urban Outfitters as apparel retailers considered “well-positioned for increasing demand for going-out clothes.”

In fact, sales of going-out apparel along with dressier fashion categories picked up in March and continued through April, softlines and specialty retail analyst Lorraine Hutchinson noted earlier this month.  Sales of beauty, intimates and activewear remained strong at retailers including Revolve, she said.

Renovation trends are seen tracking above expectations, with consumers looking to spruce up their patios and decks for friends and family get-togethers, BofA said. That should benefit home retailers such as Home Depot and Lowe’s, Tractor Supply, Bed Bath & Beyond, and Restoration Hardware. The latter two are poised to capitalize on consumers hosting get-togethers in their backyards and in their homes and in need of home furnishings and decor.

Retail trends in home furnishings have remained strong since last summer as a result of US consumers increased focus on investment (and time) in the home, favorable household formation trends, and the added benefit of government stimulus programs,” the analysts said.

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While the going is good for now, there are some metrics to keep track of as the summer progresses. The personal consumption expenditure (PCE) price deflator is a core metric that looks at inflation growth. The April PCE deflator was at 3.6 percent, with the core PCE at 3.1 percent year-over-year. The core PCE was forecast to be up 2.9 percent after increasing 1.9 percent in March. The core PCE, which excludes food and energy, is considered a good measure of inflation.

The current rate of 3.1 percent is the highest since the early 1990s, according to Wells Fargo economist Shannon Seery.

She noted on Friday that while the PCE deflator shot up 3.6 percent and is an inflation indicator that’s flashing red, it’s based off April 2020, when lockdowns drove prices down. And given the $2.4 trillion savings households stockpiled through April, she expects that goods spending will hold up. A dip here and there in some goods categories shouldn’t be a surprise “given how much demand may have been pulled forward over the past year,” Seery said.

Seery expects the services category to grab a larger share of consumer spending, given the “recreation renaissance” now that states are reopening and consumers with cash have places to go. Even though steep year-ago comparisons are largely attributable to low bases after the lockdowns last April, there’s no doubt that “inflation is heating up,” she said. Citing an April NFIB survey showing the largest share of firms raising prices since 1981, Seery expects that consumers initially could experience some form of “sticker shock,” since businesses appear to be increasingly passing on the higher costs.

That said, the “relatively healthy balance sheets of households and their desire to get out will outweigh the downside from higher prices on spending, at least for now,” Seery said.