Growing Economy Drives Consumer Spending, Despite Input Cost Relief Not Translating to Lower Prices

In the fourth quarter, consumer spending, which accounts for two-thirds of GDP, increased at a 3.3% rate. This growth was driven by higher spending on health care and financial services, although spending on goods was revised lower. Nonresidential investment figures also strengthened, with upward revisions to spending on structures, intellectual property, and equipment.

Recent earnings reports have shown that publicly-traded companies are experiencing higher gross margins due to relief on input costs, though this isn’t necessarily translating to lower prices for consumers. This trend has contributed to investor optimism, as the S&P 500 is on track for its fifth consecutive month of gains. President Joe Biden has highlighted strong corporate earnings as a sign of companies profiting off of consumers with high prices, especially in grocery stores.

The personal consumption expenditures price index, the Federal Reserve’s preferred inflation metric, rose at a 1.8% annual rate in the fourth quarter