Recent data have shown the firmest evidence yet that high inflation is damaging real consumer spending in advanced economies. Real retail sales fell in the US, UK, and euro-zone in March, while increases in Australia and Japan reflected temporary rebounds from their omicron waves. Looking ahead, high inflation will continue to weigh on real incomes, albeit to a diminishing extent as the year goes on. Households have already reduced their saving rates to manage the rising cost of living, but since those rates are now typically back to pre-pandemic levels, there is limited scope for them to fall further. With consumer confidence falling to even lower levels in April, it seems more likely that spending growth will weaken. This will dent GDP growth in advanced economies and also hamper China’s recovery from its current virus wave as exports fail to take off as they did after the first phase of the pandemic.
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