Inflation could continue for another 10 years due to high spending

U.S. households, awash with $2.5 trillion in excess savings early last year, let loose on the economy after the pandemic’s emergency phase ended. In March 2022, when US inflation had risen to nearly 8.5% and the Federal Reserve had just announced its first rate hike to cool the economy, consumer spending was still 18% higher than in March 2020 and 12% higher than before The consulting firm McKinsey had predicted the pandemic forecasts.

During the pandemic, households used their large savings and government stimulus packages to restart the economy, which in 2021 grew at the fastest pace in decades. But rampant spending has partly caused high inflation today. With spending likely to continue for some time, this could mean inflation will persist longer than it would otherwise.

Part of what’s behind the expected buying boom and “stubborn” inflation is demographics. According to Bill Smead, chief investment officer of investment firm Smead Capital Management, nearly 100 million Americans are of an age when they tend to spend big.

“We have 92 million people between the ages of 22 and 42, and they’re all going to spend their money on necessities over the next 10 years, whether the stock markets are good or bad,” Smead said in an interview with on Tuesday CNBC.

With all the big purchases like houses over the next decade, the economy will continue to run hot, making the Fed’s long-term goal of bringing down inflation much more difficult to achieve, Smead said.

Issues of Young Americans

Smead’s argument is largely supported by recent survey data. In 2021, nearly 70 million Americans were between the ages of 19 and 35, and around 150 million, or almost half of the US population, were between the ages of 19 and 54. These are the peak spending years, according to the Bureau of Labor Statistics, as spending on nearly all categories — including food, housing, clothing and transportation — increases the most between ages 25 and 54, when incomes tend to be highest and people spend most of their large make purchases.

Millennials and most members of Generation X are still in their spending heyday, and many will continue to be so in the next decade. The older members of Gen Z, who are now in their mid-20s and relatively early in their careers, are also likely to join the big spend club in the years to come.

Millennials, who overtook baby boomers as the largest age group in the US in 2020, are likely to shoulder the bulk of the spending as they jump into home buying. According to the Census Bureau, the number of Americans ages 18 to 44, who are responsible for most spending, is projected to grow nearly 5% between 2020 and 2030, which is good news for the economy, but not so much for it the reduction of inflation.

“We think inflation is going to be much tougher and last longer,” Smead said, noting that high prices are difficult to bring down above a certain level.

Sticky inflation is hard to shake off

It’s not the first time Smead has blamed high US inflation on younger generations. Last summer, when inflation was steadily breaking 40-year records, Smead said in an interview with CNBC that “too many people with too much money chasing too few goods” causes the actual inflation. Spending by young Americans over the next few years, he said, is comparable to when the baby boomers supplanted the silent generation as the country’s top spending demographic just before the inflationary crisis of the 1970s.

Consumer prices in January, a common indicator of inflation, were 6.4% higher than a year ago, the BLS said on Tuesday, the seventh straight month of a year-on-year decline. But January prices were also slightly higher than December as the cost of some items, including fuel, food and clothing, rose.

Stubborn inflation combined with a consistently strong job market means the economy is strong, but it could also complicate the Fed’s goal of bringing inflation down. Mohamed El-Erian, economist and President of Queens’ College at the University of Cambridge, for example Bloomberg Last month, inflation was expected to “stick” at 4% in mid-2023.

Whether inflation will become sticky and for how long is still up for debate. While both Gen Z and Millennials are aging in years when they are traditionally the best spenders, they are also likely to spend less in general.

Millennials have been hardest hit by inflation over the past year and, along with Gen Z, have spent less than older generations during the pandemic, particularly on large items like homes and cars. One example is the historically low homeownership rates among 30-year-olds over the past year compared to baby boomers and Gen Xers when adjusted for age. Young Americans, even wealthy ones, have been delaying big purchases more than previous generations, with many blaming slow wage growth, student debt and job losses.

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