Globalization has been reversed because of COVID, Ukraine, and sanctions. As a result, goods inflation at 10% is now significantly higher than services inflation at 5%, see the first chart.
The high level of goods inflation has destroyed demand for goods in recent months, see the second chart. But consumer services spending such as air travel, hotels, and restaurants continues to grow quickly, partly driven by revenge travel and business travel.
Looking ahead, there is more room for growth in consumer services because spending on consumer services currently makes up only 65% of total consumer spending, which is still five percentage points below pre-pandemic levels, see the third chart.
The bottom line: With high household cash balances, strong employment, and high wage growth, we should continue seeing solid consumer spending with higher growth in consumer services.
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