Americans slowed their spending spree in February, a sign that consumers are beginning to react to the runup in inflation.

Consumption rose by 0.2% in February, compared with a robust 2% uptick the previous month, the Commerce Department reported Thursday. Meanwhile, the Personal Consumption Expenditure index, the Federal Reserve’s preferred measure of inflation, showed that prices  rose by 6.4% from last year, the highest inflation rate since 1982. 

This continued consumption despite continued supply chain issues and rising energy prices indicates a robust economic recovery where consumers are eager to spend. The ebb of coronavirus cases in February spurred consumers to spend more on services, boosting a sector that was devastated by the pandemic. And a tight labor market is pushing wages up, giving workers more purchasing power.

“It just confirms what we already knew, that inflation is taking a bite out of household incomes and consumer spending,” said Gus Faucher, Chief Economist at PNC Financial Services Group. “But the fundamentals for consumers generally look pretty good, and I expect that consumer spending will continue to contribute to economic growth.”

As prices rose at historic rates in February, income also increased by 0.5%. “The wage and salary is really a sign of a strong job market,” said Scott Brown, senior vice president at Raymond James and Associates. 

But income did not increase at pace with prices. Adjusted for inflation, personal income decreased by 0.2%, continuing a seven-month streak of decreased real income. 

“Even though inflation is high, wage growth is strong and job growth is strong,” said Faucher, who pointed to the 0.8% rise in wages and salaries, which was stronger than month-to-month price hikes. 

The overall drop in income can be partially attributed to the expiration of federal pandemic relief like the expanded child tax credit, which ended in January. 

Raquel Kooper, an administrative assistant living in Mine Hill, N.J. says that higher food and gas prices are a challenge without the additional federal assistance. “With the rising prices on everything, it’s like having the extra food stamps really just helps cover the rest of the month,” she said. “But with the cost of food going up it’s like, are we back to square one?”

Kooper, a mother of three, says she tries to drive as little as possible so she does not need to fill her car’s gas tank as frequently, an expense she says has doubled from $60 to about $120. 

The services sector, which was hit hardest by pandemic closures, is also feeling the squeeze of rising energy and food prices. Demand for leisure services “has come roaring back,” said Geoff Luebkemann, senior vice president for the Florida Restaurant and Lodging Association. 

Restaurateurs and hoteliers are grateful for the business, says Luebkemann. But business owners are struggling to meet demand as they raise wages to overcome labor shortages and grapple with supply chain slowdowns. 

And on top of that, “the drive market and air travel are contending with extraordinary fuel prices right now, which is creating new headwinds,” said Luebkemann. “Every month brings something different.”

Data for the February report was collected before the economy fully felt the effects of Russia’s invasion of Ukraine, which will be evident in the next month’s reports. 

Economists will also keep an eye on effects of the Federal Reserve’s interest rate hike, announced earlier in March. “The Fed has a difficult job in trying to cool off inflation,” said Gus Faucher at PNC. “The Fed wants to bring it down to 2% gradually, but the Fed is going to have to try to do that without causing a recession and they face a difficult task ahead of them.”

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