The dramatic increase in federal debt and the expansion of monetary policy has many investors wondering if a surge in inflation is on the horizon. Although that is a risk in the medium term once growth stabilizes, in the short term, inflation typically peaks during a recession, and challenges to growth spur disinflationary pressures in the early recovery. This pattern has been somewhat accelerated during this downturn, with core CPI rising 2.4% y/y in February and decelerating to 1.2% y/y in June. However, core CPI had its first monthly increase since February, indicating that disinflation could be less pronounced this time around.

Part of this could be attributed to supply issues or businesses forced to raise prices if they are operating at lower capacities. Another explanation could be related to income distribution. According to the most recent Consumer Expenditure Survey, the top 10% of households spend 69% of their after-tax income, while the bottom 90% spend 101%, on average. Thus, the bottom 90%’s higher propensity to spend supports inflation, as additional income generates additional demand.

During this downturn, spending by high-income earners has fallen more than spending by low-income earners from pre-COVID levels, based on credit and debit card transaction data from the Opportunity Insights economic tracker. This is likely because low- and middle-income earners spend a larger share of their incomes on essentials, such as utilities, food, housing and health care, whereas high-income earners spend a larger share on areas that can be easily cut back or are harder to access in a social distancing environment, such as entertainment, hotels and apparel.

Given this dynamic, stimulus checks to households and expanded unemployment benefits through the CARES Act have likely mitigated low and middle income spending from falling further, contributing to keeping disinflation in check. In fact, in April, personal income rose 10.8% m/m despite declines in wages, salaries and asset income because transfer payments nearly doubled. As those transfer payments leveled off in May, personal income fell 4.2% m/m. Therefore, stronger disinflationary pressures could arise without another infusion of fiscal support that includes measures targeted at households. 

Spending by income group

% change relative to January 4-31, 2020, 7-day moving average

Source: J.P. Morgan Asset Management, "How Did COVID-19 and Stabilization Policies Affect Spending and Employment? A New Real-Time Economic Tracker Based on Private Sector Data", by Raj Chetty, John Friedman, Nathaniel Hendren, Michael Stepner, and the Opportunity Insights Team. June 2020. Available at: https://opportunityinsights.org/wp-content/uploads/2020/05/tracker_paper.pdf. Seasonally adjusted credit/debit card spending by consumers living in ZIP codes with high (top quartile) median income, middle (middle two quartiles) median income, and low (bottom quartiles) median income, relative to January 4-31 2020 in all merchant category codes (MCC), 7 day moving average. Data are as of July 1, 2020.

0903c02a8296387b