Despite slowing inflation, consumer spending contracted in March after slower growth in February. Morning Consult’s proprietary measure of inflation-adjusted total consumer spending decreased by 9.5% in March, mirroring the large declines in retail spending.
Morning Consult’s spending data is often directionally indicative of what to expect from the Bureau of Economic Analysis’ personal consumption expenditures report later in the month. Declines in spending for services and contraction in retail sales are likely to be a drag on top-line PCE.
Spending declined to lows for all income groups as price sensitivity rises
Although all income groups reported lower outlays in March, the highest earners had the largest decline, with a 13% reduction in total spending month over month. These shifts may be tied in part to differences in monthly income sources among these groups, and how recent market developments specifically impact these components of earnings. A similar trend is playing out in consumers' financial well-being scores: High earners experienced the largest drop in financial well-being in the last year.
Morning Consult’s measure of price sensitivity, or “sticker shock,” has increased for all income groups over the past year, indicating that consumers are more likely to walk away from a purchase because the price was too high. As previously forecasted, while low-income earners have reported higher levels of price sensitivity in general, the gaps have narrowed between each income group amid the backdrop of persistent inflation. Higher earners have seen the sharpest increase in price sensitivity, with a particularly large increase in March.
Monthly inflation decreased last month, but core inflation appears to be settling in too high
Annual inflation slowed for a ninth straight month, with monthly inflation increasing by a smaller margin in March compared with February. While there were numerous categories that showed declines, core inflation, particularly core services continued to drive most of the growth in the consumer price index. Core services have been a closely watched portion of inflation for the Federal Reserve; the category’s continued strength is a signal of the overall persistence of high inflation. Looking ahead, Morning Consult’s Supply Chain Indexes of Consumer Inflation Pressures show inflation will cool in the coming months due to easing supply measures and some slowing demand.
Consumers are walking away and trading down more
Patterns of slower demand are already apparent in Morning Consult data. For example, Morning Consult’s Price Sensitivity and Substitutability indexes have increased substantially for both new and used vehicles since March 2022. For used vehicles, both price sensitivity and substitutability increased year over year as consumers are more likely to walk away or trade down to cheaper alternatives when shopping for a used car. For new vehicles, the substitution effect is stronger. High substitution effects for new cars suggest that consumers are likely responding to rising prices by trading down for cheaper new cars or used cars, and as a result, prices for new vehicles may begin to soften.
Despite slower demand in some categories, core inflation, driven in large part by core services inflation, is sticking at a level too high to bring top-line inflation down to the Fed’s 2% target. Persistently elevated core inflation likely means that the Fed will raise interest rates moderately at its May meeting. If spending continues to contract over the next few months, inflation should also ease, allowing the Fed to pause interest rate increases this summer.
This memo offers a preview of Morning Consult’s April U.S. Consumer Spending & Inflation Report. Morning Consult Economic Intelligence subscribers can access the full report here.