One thing that could provide a headwind for household spending going forward is rising prices, but inflation pressures by most measures remain historically tame. For example, the core consumer price index in December rose at an annual rate of 1.6 percent, according to a report out this week from the Bureau of Labor Statistics. That is basically unchanged from the prior two months and below the post-COVID high hit in August. The annual rate of growth will no doubt pick up in 2021, but much of the apparent strength will simply be the result of base effects (unusually weak year-ago figures to compare to) that will diminish over time. None of this is to suggest that households will not experience pockets of inflation in the year ahead. Once the economy can permanently reopen, for instance, the release of pent up demand for air travel, hotels, casinos, theme parks, dining out, and other recreational services could cause a period of pronounced price gains in these arenas, but such conditions will gradually normalize.
Some will of course argue that the uptick in fiscal spending likely to result from the regime shift in Washington should put even more upward pressure on inflation. This may very well be true in the long run but in the near-term it is important to remember that following last year’s government-provided relief packages many Americans used their $1,200 and $600 checks to pay down debt, shore up their emergency savings, or even invest the funds in the stock market. If most consumers again effectively tuck the next round of stimulus money under their mattress rather than spend it (pump back into the economy) then any upward inflationary pressures should remain modest. And even if we assume that more Americans instead opt this time to spend the sudden windfall on additional goods and services they would not have otherwise purchased this could still prove to only be a temporary boost to inflation once the fiscal faucet is turned off. Put simply, although there is increased upside risk to consumer prices in the years ahead, it is hard to see the Federal Reserve becoming overly concerned with inflation until there is persistent evidence that household spending growth is sustainable without a constant influx of government stimulus.
Sources: Econoday, U.S. DoL, FRBSL