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Prices and spending signal a strong economy, perhaps too strong for the Fed

Another report on consumer inflation is expected in the coming week. Such is a gauge of consumer spending. Together, they can indicate how American buyers are absorbing higher prices.

Nobody had inflation on their Christmas shopping list, but a lot of people thought it was. From gasoline to toys, household appliances to hotel rooms, inflation has been an uninvited vacationer. The December consumer price index is released on Wednesday, followed by December retail sales on Friday.

Inflation trends have dominated investor concerns lately, especially as above-expected inflation has led the Federal Reserve to end its bond-buying stimulus plan months ahead of schedule. Consumer inflation rose to its highest annual rate in more than 40 years in November. The December number is unlikely to show much cooling.

What was considered temporary inflation has proven tolerable, at least for the time being. Consumers have not been deterred by higher prices.

The omicron COVID-19 surge, which began in late December, may have reduced some expenses at restaurants and travel, but it likely shifted those expenses to other pursuits and gifts. The National Retail Federation estimates that Christmas sales could increase by up to 11.5 percent year over year.

This type of spending contributes to higher prices. After all, one definition of inflation is too much demand chasing too little supply.

Many Americans have cash and credit and use both. The private savings rate was over 10 percent for most of the past year. Personal creditworthiness hit a new record high. And consumers are using their credit cards again. After falling for about a year and a half, credit card debt is rising again.

It is important to note that inflation does not affect every American household in the same way. High prices tend to creep in for richer Americans – more disruptive than breaking the budget. For poorer Americans, inflation ravages their often fragile financial condition.

More important than actual inflation and spending may be expectations about prices and spending, as these expectations drive financial decisions today. The University of Michigan’s Consumer Sentiment Index finds that inflation expectations for the next year are higher than they have been since the Great Recession.

It’s hard for economic growth to stutter or slide down as the U.S. consumer spends his pandemic-induced savings and COVID stimulus money. Instead, concerns have shifted to an economy that is too hot.

This week’s consumer inflation and retail sales data is likely to add to this narrative.

The Federal Reserve Building in Washington, DC (Dreamstime / TNS)

Financial journalist Tom Hudson is hosting “The Sunshine Economy” on WLRN-FM in Miami, where he is vice president of news. He is the former co-moderator and editor-in-chief of the “Nightly Business Report” on public television. Follow him on Twitter @HudsonsView.

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