Inflation is on the rise and consumer spending has decreased.
The implementation of US protectionist policies is likely to exacerbate these existing trends.
The ING Group believes that the tariffs and spending cuts of US President Donald Trump will intensify inflation, and reduce consumer spending.
Tariffs (taxes on imports) can increase prices and inflationary pressures for consumers.
They can also disrupt supply chains globally and decrease competition, which will further increase inflation.
Higher prices can lead to reduced consumer spending, and a decrease in confidence in the economy. This will slow down economic growth.
Cuts in government spending can have an adverse impact on the economy.
These can result in job loss, reduced services and investment. All of these can cause a drop in consumer spending and economic activity.
Concerns about Stagflation
ING Group reported that the Fed will have limited ability to cut rates further due to concerns about stagflation.
Recent economic data shows that consumer spending has been declining, and inflationary pressures are still high.
In February, inflation as measured by the Federal Reserve, the Personal Consumption Spending (PCE), increased 0.4% over a month. This was higher than expected.
The Fed may be having a harder time than expected to control inflation.
Inflation-adjusted real spending by individuals only increased 0.1% in a single month, showing that the consumer is becoming more conservative with his spending.
The weakness of consumer spending has been further highlighted by the downward revision to January’s actual personal expenditures from 0.5% contraction to 0.6% contraction.
Recession worries
A combination of high inflation and low consumer spending could lead to a possible recession.
James Knightley’s, chief economist for international markets at ING, said that the inflation figures are alarming but not unexpected.
ING believes that given the CPI/PPI inputs and the consensus of 0.3%, the risks to this number are to the upside.
Knightley stated in her report that “remember we need an average of 0.17% MoM MoM for the time being to get us to the 2% annual target.”
The inflation rate is likely to continue rising. The Fed will be unable to reduce interest rates further.
Discounts on Rates
Knightley stated that “from a perspective of growth, those possible rate reductions can’t be implemented quickly enough.”
The mood has dropped sharply as a result of the fears about reduced spending and jobs linked to Department for Government Efficiency actions, coupled with tariffs.
The decline in confidence of consumers is causing a significant reduction in spending.
Knightley said that “Fed Chairman Powell dismissed this narrative fairly earlier in the month. It will be interesting to hear if his tone changes next week.”
Revisions downwards of GDP
ING predicts that many banks will lower their GDP forecasts for the first quarter over this weekend.
If March’s consumer real spending remains flat, the result would be a negative rate of -0.1% for the first three months.
Knightley stated that “given the drag of awful trade figures, this could really lead to a negative GDP growth rate in the first quarter.”
We are heading towards the upcoming ‘Liberation Day,’ Wednesday. Then the Friday jobs report and Powell’s economic outlook speech will set us up for an unpredictable week for the markets.
The post Tariffs, spending cuts and stagflation in the US: ING warns may change as new information becomes available.
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