Will a decline in goods spending slow inflation?
Will a decline in goods spending slow inflation? That's been posed by some who see the supply of goods shortage combined with above trend consumer spending on goods as the key driver of inflation.
As we look at the data in Canada, it's clear that our spending on goods remains above trend and is not yet declining as seen in recent US releases. At the same time, even a shift back towards services spending doesn't mean that businesses have the labour capacity to provide those services which could continue to put pressure on wages.
The Economist covered the US trend in an article here (Paywall): https://www.economist.com/finance-and-economics/2022/05/29/the-changing-american-consumer. I wanted to take a look at the Canadian data for a comparison.
Overall Goods and Services Spending:
Overall consumer spending is below the pre-Covid trend by about 1%, with services 6% below the trend and goods 6% above the trend. Unlike the United States, our goods bounce back early in the pandemic was not as strong and really picked up steam in late 2021 and at the moment it isn't showing a reversal to the trendline.
Digging into the biggest consumer spending items:
A few things pop out here. First, basic spending on housing, utilities, insurance and finance was effectively unchanged throughout the whole period. The same can't be said for food, beverage and accommodation services which declined almost 50% and has still not recovered. This coincided with a smaller but noticeable increase in direct food and non-alcoholic beverage spending as consumers stayed home and bought more groceries. Also worth noting is that transport fell by nearly 50% and has recently recovered, but it should be noted that this is dollars spent not volume produced so we are likely still consuming less than before but at higher prices.
The smaller spending items:
In these classifications, most areas are back on trend with a few notable exceptions. We're still spending well above historical trend on furnishings and household goods / services and while our net expenditures abroad have started to recover, Canadians are still receiving more than we're spending abroad.
It will be interesting to see what Q2 2022 holds for us as we've seen inflation bite harder this quarter and the Bank of Canada has responded with significant rate hikes. Will that put a damper on things? Yes, eventually. But we might be looking to late 2022 before we see spending cool and we may have just witnessed some permanent shifts in consumer behaviour.