Consumers defy inflation to support economy. For how long?

WASHINGTON (AP) — With prices across the economy — from food, gas and rent to cars, airfares and hotel rooms — soaring at their fastest pace in decades, you might think Americans would tap the brakes on spending.

Not so far. Consumers as a whole are showing surprising resilience, not only sustaining their spending but increasing it even after adjusting for inflation. In April, the government said, retail sales outpaced inflation for a fourth straight month. It was a reassuring sign that consumers — the primary drivers of America’s economy — are still providing vital support and helping allay concerns that a recession might be near.

Yet at the same time, there are signs that some people, especially in lower-income households, are starting to cut back, by shifting to lower-priced or alternative items or by skipping some purchases altogether as inflation shrinks their disposable income.

Last week, for example, Walmart, which caters to price-conscious consumers, reported that more of them were favoring lower-cost store brands of lunch meat over pricier national brands and buying half-gallon cartons of milk rather than full gallons. Likewise, Kohl’s, a mid-priced department store, said its customers were spending less on each visit.

All of which has spotlighted a question floating over the economy: How long will consumers as a whole continue to spend at healthy levels — even if through gritted teeth — despite the pressures they’re feeling from inflation near 40-year highs? The answer will be key to whether the nation can avoid a recession as the Federal Reserve moves to sharply raise borrowing rates.

By most measures, consumers have downshifted from last year’s blowout spending, which was fueled by stimulus checks and other government aid after the brutal pandemic recession. This year, noted Michelle Meyer, chief U.S. economist at the MasterCard Economics Institute, steadily surging prices have dimmed Americans’ outlook for the economy.

Even so, Meyer said, there is some cause for optimism.

“There’s still plenty of reasons to believe in the resilience of the consumer,” she said, pointing to America’s robust job market and the solid pay increases many people are receiving. “There is a certain amount of frustration as they navigate the environment we’re in. But they’re still spending.”

Consider that even while consumer sentiment as measured by the University of Michigan plunged nearly 30% over the past year, Americans’ spending outran inflation during that time. Economists at Michigan noted that there has been a “historic disconnect” between sentiment and actual consumer behavior.

Some economists warn that steady consumer spending won’t likely last in the face of the Fed’s aggressive credit tightening. And if consumer spending does stay strong, the Fed might eventually have to jack up rates even further to cool the economy and slow inflation. Earlier this month, in its quest to quell inflation, the Fed raised its benchmark rate by a half-percentage point and signaled additional large rate hikes to come. Some fear the economy could slide into recession next year.

Still, several trends are driving…