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Americans' incomes rose last month, but spending — due to inflation — grew faster

AILSA CHANG, HOST:

If it seems like your expenses are outgrowing your paycheck, you are not alone. A new report from the Commerce Department today shows that Americans' incomes rose last month, but their spending grew even faster. And that's not because people are buying so much more. A lot of the extra spending is just to keep up with inflation. NPR's Scott Horsley joins us now with details of today's report. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ailsa.

CHANG: OK, so what does this report tell us about what's happening with inflation?

HORSLEY: Well, of course, we knew already that inflation is high. We saw that with the consumer price index that came out earlier in the month. This Commerce Department inflation yardstick, however, is the one that the Federal Reserve watches most closely. And unfortunately, it shows price hikes are stubborn, and they are spreading. If you strip out gasoline and food prices, which tend to bounce around a lot, inflation was actually worse in August than it was in July. And economist Shannon Seery of Wells Fargo notes we're starting to see price hikes in things like rent, which tend to be pretty sticky.

SHANNON SEERY: It really emphasizes that inflation's not letting up any time soon. When we cut through the noise of volatile month-to-month changes, we are seeing some of those major components like housing and the services side really still gaining momentum.

HORSLEY: And that means the Federal Reserve is likely to keep raising interest rates, which means it's going to be more expensive to get a car loan or a home mortgage or just to carry a balance on your credit card.

CHANG: Yeah. Well, how are people responding to these high prices?

HORSLEY: So far, they are still spending at a pretty good clip. Personal spending in August rose four-tenths of a percent from the month before. That is more than enough to keep pace with these rising prices. Now, people are shifting a bit what they're spending money on. They're spending less on stuff and more on services like transportation and health care. That has taken some of the price pressure off of stuff, which is something economists have been expecting for a while. Unfortunately, though, now we're seeing higher prices for services, especially things like rent and electricity. So it's not offering a lot of relief in the overall inflation picture.

CHANG: Well, then, how are people paying for this additional spending?

HORSLEY: Well, some of it is coming from bigger paychecks. You know, wages were up three-tenths of a percent last month. So we had more people working. They're making more money. That helps. But as we said, spending rose even faster. And Seery says that means some people are now tapping into those savings they socked away earlier in the pandemic.

SEERY: You're seeing consumers really drawing down savings and saving less of their monthly income in order to counteract inflation today.

HORSLEY: You can do that for a while but not indefinitely. We know that on the whole, bank balances are higher now than they were before the pandemic. So a lot of people do have something of a financial cushion. But some people, especially lower-income families, have started to exhaust their savings. And when that happens, people have to scale back their spending. If that happens to enough people, we could see a real economic slowdown.

CHANG: That is NPR's Scott Horsley. Thank you so much, Scott.

HORSLEY: You're welcome.

(SOUNDBITE OF COOLIO SONG, "IS THIS ME?") Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
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