Spending Rises in January Despite Inflation, Recession Fears

Consumer spending increased in the first few weeks of 2023 despite high inflation and growing fears of a recession, according to Bank of America Institute.

Bank of America’s research arm reported that credit and debit card spending by its customers rose by 5.1% year over year in January, compared to a 2.2% year-over-year increase registered in December.

While acknowledging that the yearly increase included a Covid-related slump in early 2022, the institute said the data also suggested a positive economic impact from minimum wage increases that were implemented in more than 20 states last year, as well as an increase in social security payments.

“While spending was slowing towards the end of 2022, consumers have entered the new year with a spring in their step” said David Tinsley, senior economist for Bank of America Institute. “With favorable macro tailwinds like the strength of the labor market and income gains, we have reasons to be hopeful that this increase is not just a blip but rather a longer-lasting trend.”

However, the institute emphasized that rising rent costs and food prices continued to affect household spending patterns, particularly for people on lower incomes.

“It seems unlikely, however, that a tipping point in spending will be reached in the near term,” Bank of America Institute stated in its research. “Consumers continue to have elevated savings, even adjusting for inflation, suggesting they have not yet reached their financial limits.”

The bank’s data showed that, while customer savings have been trending down over much of the past year, lower-income groups’ spending “does not look high relative to their savings” and total deposits are still higher than before the Covid-19 pandemic.