Inflationary expectations – or the fact that consumers think prices are going to increase – are on the rise. That is not surprising, given the mounting evidence of growth in both producer and consumer price indices. But what are the implications of inflationary fears for consumer spending, and what is the evidence on Long Island? The answers to these questions matter since consumer spending accounts for almost 70 percent of GDP.
Economic theory points to competing effects of inflationary expectations on spending. On one hand, consumption might increase as consumers want to make purchases now to avoid paying even more later. But inflationary expectations may also lead consumers to expect less real income in the future if wage increases do not keep pace with inflation. This could induce consumers to save more now and spend less in anticipation of less purchasing power down the line.
Empirical research suggests that inflationary expectations have little effect on non- durable goods, which are repeat, short-term purchases such as food. The evidence on durable goods (like cars) purchases is more mixed, with some studies suggesting that inflationary expectations increase spending, while one recent study reached the opposite conclusion. But because durable goods account for only 10 percent of consumer spending, the overall effect of inflationary expenditures on consumer spending should be small, whether it be in the positive or negative direction.
So, research suggests that inflationary expectations should have little effect on overall consumer spending. However, the effects on spending differ by socioeconomic status. For example, lower income individuals are more likely to cut back on high ticket items, perhaps to conserve money for essentials like food and gas. And recent survey results from the from the Siena College Research Institute indicate that New Yorkers are becoming increasingly concerned about the rising prices of food and gas.
What does recent evidence on Long Island tell us? By most available measures, spending is rising sharply. As suggested by sales tax collections, July spending increased by 32.6 percent year-over-year in Nassau County and by 36.3 percent in Suffolk. And home sales have been equally robust, with July home sales up by 58.6 percent year-over-year in Nassau County and by 43.6 percent in Suffolk. Evidence from the aforementioned Siena College Research Institute also points to strong consumer spending. Second-quarter buying plans were up from the first quarter of 2021 measurement for car/truck purchases to 22.5 percent (from 17.8 percent), consumer electronics to 47.2 percent (from 47.1 percent), homes to 13.4 percent (from 10.0 percent), and major home improvements to 34.5 percent (from 31.1 percent).
Inflationary concerns do appear to rattle financial markets as investors fear the Federal Reserve Bank may raise interest rates to quell inflation. But inflationary fears appear to have had little effect on the real economy, at least to this point.
John Rizzo is chief economist for the Long Island Association.
This content was originally published here.