THIS INFLATION REPORT COULD CRASH THE ECONOMY

[00:00:00] Speaker 1: America has just received one of the most important inflation reports of the year and while markets still look calm the warning signs underneath are growing. Prices are rising again. Gas is squeezing households. Savings are falling and the American consumer is starting to look much weaker than the headlines suggest. CNN reported high gas prices pushed up inflation again last month while adding to Americans financial strain. Households are saving at the lowest rate in nearly four years a new report showed Thursday. The Iran war's oil price shock lifted the Federal Reserve's preferred inflation gauge to 3.8 percent in April from 3.5 percent the month before according to Commerce Department data. The personal consumption expenditures price index rose 0.4 percent on a monthly basis slowing from a 0.7 percent increase in March. Consumer spending which powers about two-thirds of the economy rose 0.5 percent in April a seemingly resilient but slower pace than the one percent jump in March. That is the key to this whole story. Inflation is moving higher again but the economy is still pretending it can handle it. The PCE price index matters because it is the Federal Reserve's preferred inflation measure. This is the number the Fed watches closely when deciding whether to cut interest rates keep them where they are or even consider tightening again. And right now this report gives the Fed a problem. Inflation is still above target. Energy prices are pushing costs higher. Consumers are still spending but that spending is slowing. And once inflation is taken into account the increase in spending inflation. It looks much weaker. In simple terms people are paying more but they are not necessarily buying much more. That is not a healthy kind of strength. That is the kind of strength you see when households are trying to survive higher prices. And this is why the title matters. This inflation report may not crash the economy in one day. That is not how these things usually happen. But it can expose the conditions that lead to a crash or a sharp slowdown. If inflation stays high the Fed cannot easily cut interest rates. If the Fed cannot cut rates borrowing stays expensive. Mortgages stay high. Credit cards stay high. Car loans stay high. Business debt stays high. And when the cost of money stays high while prices are still rising. Ordinary people get squeezed from both sides. They pay more for daily life. And they pay more to borrow. That is when pressure builds quietly. And the danger is that markets often ignore that pressure until it's too late. Take a look at this clip where they discuss how the economy still looks stable on the surface. But inflation is becoming something markets may be looking through too quickly. [00:03:26] Speaker 2: The situation now we have neither gloom nor boom. We have a healthy rate of growth that is going to allow inflation to return to a downward trend once we have this situation with Iran out of the way. [00:03:43] Speaker 1: Yeah. It seems to me, Liz, that the markets are just looking through this spike in inflation. Absolutely. That clip is important because it captures the mood right now. The economy is not in obvious freefall. It is not all gloom. But it is not a clean boom either. That is why this moment is so dangerous. When things are clearly terrible, people pay attention. But when the economy looks good enough, on the surface, investors and politicians can convince themselves that the danger is manageable. They can say inflation is temporary. They can say consumers are resilient. They can say markets are still rising. But none of that changes the basic reality for households. If gas is more expensive, food is more expensive, utility bills are higher, and wages are not rising fast enough, then the pressure is real. And eventually, that pressure shows up somewhere. CNN reported Thursday's data exposed some of that underlying fragility. Households are feeling the pinch from higher inflation now. Kathy Bostjanic, chief economist at Nationwide Mutual, told CNN in an interview. Consumers' income were flat for the month. Disposable income fell by 0.1%, and inflation-adjusted disposable income dropped by 0.5%. Americans continued to tap their piggy banks. Their personal savings rate dropped to 2.6% in April, marking the lowest rate since June 2022. This is the part that should raise alarm bells more than the headline inflation number. The savings rate is falling. That means Americans are using up their cushion. They are still spending, but they are spending with less protection underneath them. At the start of the year, the savings rate was higher. Now it has dropped sharply. That tells you households are being forced to absorb higher costs by saving less. And that can continue for a while, but it cannot continue forever. A family can dip into savings for one month. They can do it for two months. They can put more on a credit card. They can delay a purchase. They can cut back on certain things. But if prices keep rising and income does not keep up, eventually something has to give. This is why consumer spending is such a big deal. The American economy depends on consumers. When consumers are strong, businesses keep selling, companies keep hiring, restaurants keep filling tables, retailers keep moving products, and the economy keeps growing. But when consumers weaken, the slowdown spreads. People cut back on eating out. They delay holidays. They buy cheaper products. They reduce subscriptions. They avoid big purchases. Then businesses feel it. Then profits come under pressure. Then hiring slows. Then unemployment rises. That is how a household problem becomes a national economic problem. Take a look at this clip where Steve Ratner explains why Americans are becoming more pessimistic about inflation and why expectations are [00:07:25] Speaker 3: moving in the wrong direction. So why is that? As you said, inflation is in the picture. And this measures actually not inflation, but how consumers think prices are going to behave over the coming year. How much are they going to go up? So how are they feeling looking forward? Back at the time of the election, it hit a recent low at 2.4%. People thought inflation was well under control. Then you had Liberation Day when the tariffs and everybody explaining the tariffs are going to add to inflation. Expectations shot up here over 6%. Then they declined again. But now with the war, they're up to 4.8%. So inflation is running at the moment at 3.8%. Consumers think it's headed to 4.8%. And that adds to this [00:08:07] Speaker 1: incredible pessimism. That clip matters. Because inflation is not only about what prices are doing today. It's also about what people believe prices will do tomorrow. If people believe prices will keep rising, their behaviour changes. Workers may demand higher wages. Businesses may raise prices before their costs rise further. Consumers may rush to buy things before they become expensive. And the Federal Reserve watches inflation expectations very closely. Because once people stop believing inflation will come down, inflation becomes harder to control. That is why this report is so dangerous. It's not just showing higher prices. It's showing a mood change. People are becoming more worried. They are expecting inflation to stay high. And once that psychology takes hold, it can spread through the economy. The other problem is that this inflation is hitting essentials. CNN said much of the spending increase was on gas and other necessities, including fuel, energy, utilities, housing and food. That matters because people cannot easily avoid these categories. You can delay buying a new TV. You can skip a holiday. You can eat out less. But most people still need to drive to work. They still need electricity. They still need housing. They need groceries. So when inflation hits essentials, it is much more painful. It forces people to spend more even if they don't want to. And that can make the economy look stronger than it really is because the spending data rises while the household reality gets worse. CNN reported: "Much of last month's spending in Greece was on gas and other essentials. The war driven shock has sent gas prices sharply higher, started to push up the price of food and threatens to make other goods and services more expensive. Rising prices, sluggish income and increased economic uncertainty could set the stage for a broader pullback in consumer spending. While prices are rising faster than comfortable, incomes are not, putting consumers in an uncomfortable spot. That is the clearest warning in the entire story. Prices are rising faster than comfortable, but incomes are not. That is the squeeze. And when people are squeezed long enough, they eventually pull back. The danger is not only inflation itself. The danger is what inflation forces the Fed and consumers to do. The Fed may have to keep rates higher for longer. Consumers may have to cut back. Businesses may face weaker demand. Markets may have to accept that rate cuts are not coming as quickly as quickly as investors hoped. And if all of that happens at the same time, the economy becomes much more fragile. Take a look at this clip where they explain why the economy feels very different for ordinary Americans than it does for people watching the stock markets." So here we again take the Michigan [00:11:48] Speaker 3: consumer sentiment numbers. You can see that 73-year all-time low. On the other hand, you've got stock valuations at essentially close to an all-time high. And so it has gone very well for owners of stocks and very badly for people, average Americans. Another way to think about it is corporate profits. Corporate profits were ticking along at a 13% growth rate. That's a lot, obviously, 13% year over year, every quarter. But in the first quarter of this year, it shot up to 28%. That's part of why the stock market is doing so well, obviously. So the owners of the stocks are doing quite well. By the way, the top 1% of Americans own 50% of the stocks. The top 10% own 87% of the stocks. But for the average American, there's just been fairly modest wage increases, 3.8% year over year relative to corporate profits going like this. So you've got owners of stocks and higher income people doing incredibly well, people at the bottom doing not so well. And also last comment on this. Inflation is now running ahead of wage increases. So people are actually losing ground in terms of how much they can buy. [00:12:58] Speaker 1: This is the real divide in America's economy right now. On one side, the stock market can look strong. Corporate profits can rise. AI companies can attract huge investment. Wealthier households can continue spending. But on the other side, average Americans are watching prices rise faster than their wages. They are seeing their savings shrink. They are cutting back on gasoline. They are feeling poorer even if the official numbers say the economy is growing. That is why there is such a big gap between Wall Street and Main Street. Wall Street looks at markets. Main Street looks at the grocery bill. And this is what makes the inflation report so important. It's not just a report about prices. It's a report about the strength of the consumer. It tells us whether people can keep carrying the economy. And right now, the answer is not as strong as it looks. Spending is still positive. But real spending is weak. Income is flat. Disposable income is falling. Inflation adjusted income is falling even more. Savings are being drained. That means the consumer is still standing, but the foundation underneath the consumer is getting weaker. This also puts the Federal Reserve in a trap. If the Fed cuts rates too soon, inflation could become worse. But if the Fed keeps rates high for too long, it could damage the economy. That is the nightmare scenario. The Fed wants inflation to come down without causing a recession. But this report makes that much harder because it shows inflation moving in the wrong direction at the same time households are becoming more strained. If the Fed waits, consumers suffer. If the Fed cuts, inflation may rise again. That is why investors should not treat this as just another data point. The bigger risk is stagflation. That is when inflation stays high while growth slows. It is one of the hardest economic problems to deal with because the normal solutions clash with each other. To fight inflation, you keep interest rates high. But to support growth, you usually cut rates. So what happens when inflation and growth is weak at the same time? That is when policymakers lose easy options. And this CNN report contains the early signs of that kind of problem. Higher inflation, weaker real incomes, slower spending, falling savings and uncertainty caused by energy shocks and tariffs. So no, this inflation report does not mean the US economy collapses tomorrow. But it does mean the economy is more vulnerable than many people think. It means the consumer is under pressure. It means the Fed may be stuck. It means the market may be too relaxed. And it means the gap between the official economy and the lived economy is getting wider. Politicians can say the economy is strong. Investors can celebrate record highs. Analysts can point to growth. But if ordinary Americans are draining savings just to keep up with higher prices, then the economy is not as safe as it looks.