How the American consumer may be saving the economy by spending less - and keeping inflation at bay

• Early indicators suggest Americans are cutting spending on certain items, which is keeping inflation at bay.
• Prices for used cars and homes skyrocketed in the spring, and consumers now seem wary.
• Since durable goods fueled much of the recent inflation overshoot, lower spending on them could halt a spiral.

Inflation is back, maybe you heard. Or is it?

One side of the debate that has raged since the economy reopened argues Democrats' latest stimulus is lifting inflation to dangerous levels.

The other camp, which includes the Biden administration and the Federal Reserve, attributes the recent jump in price growth to the economic reopening and views the overshoot as "transitory." But it was quite a jump, as inflation soared to its fastest rate since 2008 in May.

For all the hemming and hawing over inflation, countering dangerous price growth is relatively simple: Consumers' spending habits decide whether inflation spirals out of control. After governments reversed lockdown measures and vaccines reached arms, retail sales hit record highs, as reopening turned into a bona fide spending boom.

The problem with this spending boom is that supply has come up short. Bottlenecks throughout the global economy have slowed the production of goods ranging from furniture to ketchup, causing shortages almost everywhere you look and, in turn, massive price increases. And it's spending on stuff, or durable goods - think cars and appliances rather than food and fuel - that has led broad inflation gauges higher through reopening. Prices within the category rose 3% from April to May alone after soaring 3.5% the month prior.

The American consumer is pretty intelligent, though, as early signs suggest they are shifting their spending patterns, in apparent recognition that a few key items are way out of step in terms of price increases. Instead of caving to higher prices, Americans appear to be holding off on some purchases and giving suppliers some extra time to catch up.

Used car and truck prices were the single largest contributor to the Consumer Price Index in April and May, rising 10% and 7.3%, respectively. A global shortage of semiconductors hobbled auto manufacturers through spring, leaving many to seek out previously owned vehicles.

Yet recent indicators show the price surge slowing sharply in June. The Manheim Used Vehicle Value Index rose just 0.3% in a preliminary June reading, down from the 4.8% jump in May. The meager increase signals used-car inflation could be nearing its peak before reversing course.

Separately, 24% of Americans referenced high vehicle prices when evaluating the autos market in May, according to the University of Michigan's consumer sentiment survey. That's the highest reading since 1997.

A similar trend is emerging in the housing market. Sales of both existing and newly built homes slid again in May as a dire housing shortage has sent prices soaring. At the same time, a record-high 48% of consumers cited high prices in their evaluations of the housing market, according to the University of Michigan survey.

The unevenness is "all common sense," John Cochrane, a senior fellow of the Hoover Institution at Stanford University, wrote in a June 10 blog post.

"Bar and restaurant prices went down in the pandemic, less so TVs and gym equipment, and 'stuff' is now really getting hard to find and to produce," he added.

There's reason to be optimistic, according to Bank of America economists. Demand is likely to persist well after supply constraints are addressed. Americans spending today will simply pay a "temporary inflation tax" on some goods, and those deferring their demand will drive a jump in activity once price growth cools, the team led by Ethan Harris said.

"While a lot has been made of the temporary inflation pressures, there is much less discussion of the temporary constraint on real activity. However, you can't have one without the other," they added.

In other words, it depends on all of us, and our spending habits, to make sure inflation doesn't spiral out of control, and we are looking pretty responsible about that in the summer of reopening.