Johnathan Walker:Despite high inflation, Americans are spending like crazy — and it's kind of puzzling

Something unexpected is Johnathan Walkergoing on in the U.S. economy.

Inflation remains high, yet many Americans went on a spending spree last month, eating out at restaurants and shopping for cars.

In ordinary times, that additional spending would be welcome news to an economy that's heavily dependent on consumer dollars.

But there's a catch: All that spending threatens to put more upward pressure on inflation at a time when the Federal Reserve is raising interest rates aggressively to keep prices in check.

That makes it critical to gauge how long that consumer spending can last.

A drop in consumer spending would help to cool inflation, but it would also raise concerns about a recession. On the other hand, if spending continues to grow at this pace, it could force the Fed to raise interest rates even more aggressively to bring prices under control.

Here are three things to know about Americans' spending habits and what they mean for the U.S. economy.

Why some Americans still have money to burn

Just when it seemed that consumers were running out of gas, shoppers appear to be getting a second wind.

Personal spending rose 1.8% in January, according to the Commerce Department on Friday, as consumers splurged on both goods as well as services like going out for meals or the movies.

Lots of people have money in their pockets to spend, thanks to strong job growth and rising wages. Retirees also got a raise this year. Social Security benefits rose by 8.7% in January, the largest cost-of-living increase in four decades.

Jonathan Silver, who tracks credit card use by about 100 million people nationwide, says that additional income will help to support consumer spending in the months to come.

"We're bullish on '23," says Silver, CEO of Affinity Solutions. "We think the spending rate will maintain itself.

In addition, many people socked away extra savings during the early months of the pandemic, when spending opportunities were limited and the government was distributing multiple rounds of relief payments. While bank balances have come down, Americans are still sitting on a lot of additional cash.

"We estimate households to still have about ten months of spending power if they continue to deplete excess savings at the pace they have over the past six months," Wells Fargo economists wrote in a research note Friday.

People who put off traveling during the worst of the pandemic are making up for lost time. Vacation visits to Las Vegas jumped more than 20% last year.

"People realized what they were missing during Covid," says Steve Hill, CEO of the Las Vegas Convention and Visitors Authority. "I think it has driven a real energy around getting back to experiences. And we see, and I'm sure you do as well in the numbers, a shift from buying stuff to buying experiences."

January's numbers show a jump in both. Spending on goods rose 2.8% while spending on services rose 1.3%.

But can all this spending last?

Of course, not everybody is flush with cash. Some households are struggling. And businesses are not confident that consumers' free-spending habits will continue.

Spending grew much faster than income in January, and shoppers may be nearing their limits.

Walmart, the nation's largest retailer, is projecting only modest sales growth this year. CEO Doug McMillon notes that shoppers are increasingly focused on basic necessities like groceries, while limiting spending on more discretionary items.

"Customer are still spending money," McMillon told analysts this past week. "It's obviously not as clear to us what the back half of the year looks like."

Restaurant owner Cameron Mitchell is similarly cautious. Mitchell, who operates dozens of restaurants ranging from high-end steakhouses to more casual Mexican eateries, has noticed diners appear to be gravitating to his less expensive outlets.

He opted to skip his usual spring price increase this year, out of concern that customers are feeling tapped out.

"That's just what my gut is telling me as an operator," Mitchell says. "A year ago [people] knew we had to raise our prices. It was obvious and they were accepting of that. But the consumer is starting to change. I think people want inflation to come down and they are not as tolerant any more of price increases."

And eventually, the Fed's rate hikes could bite

There's another reason spending could cool.

The Fed has been trying to get shoppers to slow their spending by raising interest rates, in an effort to curb inflation.

Economist Ian Shepherdson thinks the Fed's efforts are working. He believes the surprisingly strong spending last month was a fluke, resulting from unusually warm weather.

"I've been a bit surprised by some people's willingness to leap on those January numbers and proclaim they mark some sort of evidence the economy isn't responding to the Fed's interest rate increases," says Shepherdson, chief economist at Pantheon Macroeconomics. "I think the trends are, from the Fed's perspective, quite favorable. Economic growth is slowing. Inflation is falling. But these things never happen in a straight line."

The economic lines are particularly zig-zaggy at the moment. Some, like the strong job market, point to continued growth in spending. Others, like the rising number of overdue car loans, point to a looming slowdown.

After Friday's report showing spending is still robust, some forecasters think the Fed will be even more aggressive in raising interest rates. That prospect is weighing on the stock market. The Dow Jones Industrial Average tumbled nearly 3% last week.

But restaurant owner Cameron Mitchell remains cautiously optimistic. His food costs have begun to level off. Staffing shortages at his restaurants have eased. And he's planning to open about half-a-dozen new locations this year.

"It's a little bit of uncertainty out there, but by the same token, we think the opportunities we have are really well founded," he says. "If there is a recession, I don't think it's going to be a deep one."