Friday, July 30, 2021

Consumer Spending Spurs Growth, Inflation

Real gross domestic product increased at a 6.5 percent annualized rate in the second quarter, up from a 6.3 percent pace in the first quarter. Over the past four quarters, real gross domestic product is up 12.2 percent, putting the level almost back on trend.

Growth in the second quarter was led by consumers. Real consumer spending overall rose at an 11.8 percent annualized rate, beating the strong 11.4 percent rate in the first quarter, and contributing a total of 7.8 percentage points to real GDP growth. The pattern of contributions to growth among the components of consumer spending in the second quarter was the mirror opposite of the first quarter, as the second quarter was led by consumer services, followed by nondurable goods and then durable goods.

Spending on services grew at a 12.0 percent rate, contributing 5.1 percentage points to real GDP growth, while nondurable-goods spending rose at a 12.6 percent pace, contributing 1.8 percentage points, and durable goods spending rose at a 9.9 percent pace, contributing 0.9 percentage points. Within consumer services, spending was particularly strong on food services (restaurants), travel, accommodations, and recreation services as consumers emerged from pandemic restrictions.

Consumer price measures also showed a rise in the second quarter. The personal consumption price index rose at a 6.0 percent annualized rate, up from a 4.3 percent pace in the first quarter. From a year ago, the index is up 3.8 percent. Excluding the volatile food and energy categories, the core PCE (personal consumption expenditures) index rose at a 6.1 percent pace versus a 2.7 percent increase in the first quarter. From a year ago, the core PCE index is up 3.4 percent.

While there is significant concern being expressed about the potential for a sustained surge in consumer price increases, there are still major distortions in prices and the financial system resulting from government policies, disruptions to supply chains, and changes to consumer spending habits. Since many of these distortions are likely to be temporary, a 1970s-style resurgence in persistent consumer price increases remains unlikely.

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