The Zhitong Finance App learned that so far, the US economy since this year has not been as good as expected: inflation is higher than expected, and household spending seems to have lost some momentum. These trends have brought new risks to the US economic growth forecast. Based on the view that a rapid slowdown in inflation will help raise real income and lower borrowing costs, the US economic growth forecast was raised at the beginning of this year.

Notably, the two important reports to be released this Wednesday, the consumer price index and retail sales data, will show the threats facing the US economic outlook. Wage and wage growth slowed in April, and if the rise in prices does not cool down accordingly, household budgets will be further tightened.

Neil Dutta (Neil Dutta), head of American economics at Renaissance Macro, said, “If inflation continues to be high, this will actually pose a huge downside risk to economic growth prospects because the labor market is not in the same place. You're going to have to start worrying about what this means for actual earnings.”

In the first quarter of 2024, the consumer price index (CPI), excluding food and energy, rose by 4.5%, up from 3.3% in the fourth quarter of last year. Meanwhile, according to Bloomberg Economics estimates, retail sales increased by only 0.4% in the first quarter after adjusting for inflation, compared to 2.9% for the full year of 2023.

Economists expect the monthly inflation rate in April to fall back to a level more consistent with the end of 2023, while retail sales growth without adjustment for inflation will slow.

Forecasters usually don't change their outlook after a few surprises, but there are signs that after three consecutive months of higher inflation than expected, people are beginning to have doubts. Consumers may have been inspired by these reports. In a recent University of Michigan survey, inflation expectations for the next year have risen.

Federal Reserve Chairman Powell said in a speech after the Federal Reserve's latest policy meeting on May 1 that officials “don't like to react to the data for one or two months, but this is a complete quarter, and I think it is appropriate to send a signal now.” At this meeting, Federal Reserve officials kept interest rates at their highest level in more than 20 years, and this has been the case since July.

Economists at S&P Global Market Intelligence said in a May 9 report that due to the late start of the Federal Reserve's interest rate cut, they have slightly lowered their economic growth expectations for 2025 and 2026.

That's why this week's data is so important, especially as there are signs that the labor market is cooling down. The US monthly employment report released on May 3 shows that in the three months up to April, the average hourly wage annualized increase was only 2.8%, the lowest since the first quarter of 2021. And the resignation rate, a leading wage indicator that has received widespread attention, indicates that the future deceleration will be even greater.

Meanwhile, according to a recent estimate from the San Francisco Federal Reserve, the excess savings accumulated during the pandemic, another major driver of consumer spending in recent years, may eventually run out in March.

Suffice it to assume that the recent upward trend in inflation will reverse within the next few months. One of the main reasons for the rise in the consumer price index is that rent inflation has slowed less than expected. This indicator often lags behind, in part because official data only reflects changes when people move or renew their rent, and it should soon begin as current rents fall.

Another major factor is the sharp rise in motor vehicle insurance costs, and economists expect this factor to slow down eventually. Forecasters believe that rising housing and insurance costs do not reflect an increase in potential demand, which means they do not threaten a further rise in inflation.

A team of economists at Morgan Stanley, led by Ellen Zentner, wrote in a May 9 preview of inflation data: “We were surprised by the rise in auto insurance, but we saw no evidence that structural changes were pointing to a continued acceleration.”

They said, “In fact, we think the higher profitability of the sector will cause insurers to shift to a more growth-oriented strategy, which means auto insurance inflation will decline in the future.”

This will be great news for consumers who are increasingly using their savings. The increase in personal consumption spending in the first quarter was largely due to a decline in the savings rate, which fell to its lowest point in 17 months in March.

“You really need to see inflation weaken to maintain good consumer expectations,” Duta said.