Inflation starts to drag on consumers powering U.S. economy

There are early signs that U.S. consumers, who have been largely resilient in the face of relentless inflation, are beginning to balk at high prices.

From Whirlpool Corp. to Procter & Gamble Co., companies are noting that shoppers are feeling the pinch, and in some cases buying less, a trend economists dub demand destruction. That might be a worrisome signal that consumer spending—the powerhouse of the U.S. economy—is losing steam.

Economists expect data out Thursday to show inflation-adjusted personal consumption to have grown at just a 1% annualized pace in the third quarter, the weakest rate since the early days of the pandemic and half the pace seen in the previous quarter. Gross domestic product is projected to rebound in the period, but largely because of a decline in imports.

“It’s hard to really increase your consumption if your real income is heading lower,” said Sarah House, senior economist at Wells Fargo & Co. Households are instead having to rely on savings to help keep “consumption where it is.”

Even though GDP growth is expected to be positive for the first time this year, it’ll likely mask weaker details, like the softer pace of consumption and a sharp deterioration in the housing market. Many economists see the U.S. in a recession in the next 12 months as the Federal Reserve’s steep interest-rate hikes take a further toll on demand.

Inflation has outpaced wage gains on an annual basis every month since April 2021. That, in addition to shifting consumption patterns toward services, helped drive a drop in inflation-adjusted goods spending in July and August. September data will be released Friday.

Last week, Whirlpool CEO Marc Bitzer said “ongoing macroeconomic headwinds and continued elevated levels of inflation” resulted in slowing demand. The combination of higher food and gasoline costs, rising interest rates and the “inflation of the products themselves” is squeezing consumers, according to Michael Happe, CEO of RV manufacturer Winnebago Industries Inc.

Toymaker Hasbro Inc. also noted consumers are becoming “increasingly price-sensitive,” and P&G, which produces a range of household staples like Tide laundry detergent, pointed to “some volume reduction” amid price increases and general inflationary pressures.

Data out Tuesday showed U.S. consumer confidence fell in October to a three-month low as widespread inflation and growing concerns about the economic outlook weighed on Americans. In reporting earnings, Coca-Cola Co. said it benefited from bundling different sizes and mixes of its products for price-conscious consumers.

While those trends have been illustrated by stagnating retail sales, many services, notably air travel, continue to see robust demand. Despite airfares surging nearly 43% over the past year, American Airlines sees no signs of demand slowing, Chief Financial Officer Derek Kerr said last week.

At restaurants, one of the key beneficiaries of pent-up demand after COVID-19 restrictions eased, sales adjusted for price changes have slowed in recent months. A September survey from research firm Datassential Inc. found half of consumers had recently cut back on restaurant meals due to high inflation. It was the No. 1 expenditure respondents opted to trim, followed by apparel and travel.

Data out Monday from S&P Global showed a measure of business activity at service providers contracted in October, falling to its second-worst reading since May 2020. The group attributed the decline to weak client demand, rising interest rates and stubborn inflation.

While a pullback in gasoline prices from record highs this summer has given consumers some relief, a gauge of underlying inflation accelerated to a fresh 40-year high in September. That’s contributing to a savings rate near the lowest since the Great Recession and a greater reliance on credit cards.

Most economists expect Americans to keep spending at a relatively lackluster pace through the end of the year. Overall uncertainty about consumer spending is weighing on a range of companies.

Trucking firm Knight-Swift Transportation Holdings Inc. warned last week of a rapid slowdown in the freight market, with businesses slowing their orders out of concern that consumer demand won’t hold up. Similar fears took a gauge of manufacturers and services providers’ views of the future to a two-year low in October.

Looking to next year, it’s unclear to what extent consumers will be able to spend amid still-high prices, especially if rapidly rising interest rates begin to lead to a significant softening in labor market conditions.