US consumers keep spending as gas and inflation bite

American consumers are spending through gasoline at $4.39 a gallon and inflation at 3.8 per cent — a combination that has kept the US economy expanding even as household anxiety builds. Nearly three months into the Iran war, sentiment readings have slumped. The cash registers have not followed them down.

Consumption is still the main shock absorber in the US cycle. The New York Times reported that retail sales rose 0.5 per cent in April despite higher fuel costs. Reuters reported that consumer prices posted their largest annual gain in three years as price increases spread beyond gasoline. Higher spending and hotter prices send different signals about the quality of growth. Both readings can be true at once.

Stephen Stanley of Santander Capital Markets captured the resilience case bluntly, calling the US consumer “simply remarkable”. Card data lends weight to that reading. MarketWatch noted that Bank of America Institute card spending excluding gasoline was still up 4.0 per cent over the 12 months ended in April. Higher-income households appear willing, or at least able, to keep buying travel, meals out and discretionary goods even as the pump takes a larger bite from weekly budgets.

The same data also shows why an all-clear would be premature. Jefferies economist Thomas Simons noted that consumers had not yet cut their Amazon deliveries or restaurant trips — resilience concentrated at the top of the income ladder. Reuters’ retail-sales report flagged that a record jump in gasoline receipts flattered the headline gain. Part of the apparent strength reflected price, not volume.

The consumer story looks stronger in retail tables than on the ground. A household that fills its tank twice in one week pushes up nominal spending even if it leaves the supermarket with fewer bags. For equity and rates markets, the distinction matters. Nominal spending props up quarterly revenue while keeping inflation noisier and obscuring whether real purchasing power is actually improving.

Nominal strength, real strain

Macro Renaissance Research head of economics Neil Dutta put the problem more sharply: dollars are getting spent but not much stuff is being bought. A retail-sales report boosted by fuel costs can look healthy when households are reallocating spending rather than expanding it. Money that goes to the pump does not go to apparel, home goods or lower-margin services. That distinction feeds into corporate earnings and any read-through to real GDP.

The pressure is not distributing evenly. A New York Fed analysis of the gasoline shock described a K-shaped pattern at the pump: lower-income households cut mileage and fuel use more aggressively than better-off drivers. A related PBS News report found that lower-income Americans were using less gas while absorbing the hardest hit from the price spike. Aggregate spending can stay firm even while a meaningful share of households begins to act as though the cycle has already turned.

For markets, the consumer story is shifting from whether spending is still rising to who is doing the spending. When affluent households carry the totals, the macro data looks durable for longer than consumer-confidence surveys would suggest. The eventual slowdown, if it arrives, may come late and then surface suddenly in categories tied to lower- and middle-income demand — discount retail, casual dining, domestic travel.

The April inflation print is more consequential than the headline number alone suggests. Reuters reported that prices rose broadly in April, not just at the pump. If higher gasoline were the only problem, households could treat the squeeze as a temporary tax. When food, shelter and services stay firm too, the budget pressure compounds. Consumers keep spending in nominal terms, but each extra dollar buys less relief.

For the Federal Reserve, that mix is awkward. Strong nominal demand makes it harder to argue that household spending is fading quickly enough to cool pricing power. Yet the composition of that demand looks less healthy than the topline suggests. Households leaning into essentials while trimming flexibility does not look like a broad-based discretionary boom. Resilience can keep inflation sticky and still leave the cycle more fragile underneath.

What keeps growth alive

Policymakers and investors have been slow to call time on the expansion for a reason. Payroll growth has not broken decisively. Balance sheets for higher-income households remain healthier than those of lower-income peers. Companies exposed to upper-end consumption are not yet describing a collapse in demand. The economy has absorbed an energy shock without slipping into contraction, even as sentiment darkens.

Resilience built on income segmentation is a thinner cushion than the topline spending data imply. If fuel stays elevated, inflation remains sticky and labour-market momentum cools, the households that have carried consumption will eventually face their own trade-offs. The lag tends to be psychological before it becomes statistical: consumers complain first, postpone selectively later, and cut more broadly only after that. Markets care about the delay because it can keep risk assets supported right up to the point when earnings expectations have to catch down.

For now, the US consumer holds as the economy’s working shock absorber. The spring data tells a story of selective endurance rather than broad strength. Spending is keeping growth afloat, but the burden is concentrating in fewer hands. That arrangement has rarely held for long.