U.S. households are burning through their financial cushion at an accelerating pace as prices, especially energy costs tied to the Iran war, remain high, new figures show.
Consumer spending rose in April even as disposable personal income fell, suggesting that many Americans are no longer spending from strength but from savings. The personal saving rate fell to 2.6% in April, down from 3.2% in March and 4.3% in January, according to the Commerce Department. That is the lowest level since mid-2022 and one of the weakest readings in 65 years of data.
"While prices are rising faster than comfortable, incomes are not, putting consumers in an uncomfortable spot," NerdWallet senior economist Elizabeth Renter wrote when analyzing the data. The Commerce Department said consumer spending rose 0.5% in April while disposable personal income fell 0.1%. Gasoline and energy goods were the single-largest contributor to the increase in spending, Axios noted.
The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures Price Index, rose 0.4% in April compared to the previous month. That was less than March's 0.7% increase, but still uncomfortable for policymakers and consumers. Core PCE, which excludes food and energy, rose 0.2% for the month, but climbed 3.3% from a year earlier, the highest annual reading since 2023.
Fed Gov. Lisa Cook warned this week that "inflation is clearly moving in the wrong direction." But the deeper concern is real income. Axios' Matt Phillips noted that real per capita disposable income, which adjusts for taxes and inflation, fell 1.4% in April from a year earlier. It also declined in March, marking the first back-to-back negative year-over-year readings since late 2023.
When people have less inflation-adjusted income, they eventually cut back. Since consumer spending drives much of the U.S. economy, even a modest pullback can cause a ripple effect. The low savings rate can sometimes signal confidence if people spend because they expect higher pay or greater job security.
However, if more money is going toward gasoline and energy, the spending is less a sign of optimism than survival. "Rising prices, sluggish income and economic uncertainty could set the stage for a broader pullback in consumer spending and therefore economic growth," Renter wrote.
The economy is also increasingly uneven. Higher-income households continue to spend while lower- and middle-income families have less room to absorb higher costs. Olu Sonola, Fitch Ratings' head of U.S. economics, said aggregate spending is still being supported by "the wealth effect and the upper end of the K-shaped economy," but that support is doing more of the heavy lifting, making the broader spending picture "increasingly uneven and fragile."
