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Why Consumers Are Spending Less

NEW YORK (TheStreet) -- Last week, economists were touting higher credit card spending, among other positive trends, as a sign of a healthier economy.

But the economy is nothing if dynamic, if not frustratingly topsy-turvy, and data this week show consumers may not be as bullish as thought, thanks to a proposed interest rate hike and growing inflation in key consumer spending categories. Both could set back economic growth.

Economists have warned for years low rates couldn't last forever, and with higher interest rates around the corner, according to the president of the St. Louis Federal Reserve, the dominoes already seem to be falling, including one that has Americans decreasing their spending in advance of looming inflation. 

Also see: 5 Financial Stats Pointing to an Improving Economy

"Generally, rising interest rates are bad for consumers and bad for the economy," says Terry L. Seaton, a certified public accountant in St. Augustine, Fla. "However, because the Federal Reserve has artificially reduced interest rates to historically low levels, we probably need to endure the painful process of raising rates back to a 'healthy' level that properly balances the needs of all stakeholders, including businesses, savers, consumers and investors."

Other experts agree, noting the effect higher rates will have on budgets, debts and spending.

"Obviously, higher interest rates mean higher mortgage rates and make it harder for people to get out of debt, because finance charges will be higher," says Rodney Harano, a CPA in Honolulu. "Prudent borrowers may want to pay off existing debt, because as interest rates increase, the cost of goods and services may increase."

That's pretty much what Americans are doing ahead of fatter rates and rising inflation making life more expensive for the average household. While consumer spending has fallen for the past two months, food prices are up 2.5% since mid-2013 and expected to rise by 3.5% this year, especially for staples such as fruit, dairy and pork.

Also see: CD Rates Could Rise With Fed, But Watch Out for Fees

Gasoline prices are spiking upward too, with the national average at $3.68 per gallon. Gas prices were supposed to fall this summer, according to the American Automobile Association. But geopolitical volatility in Iraq changed that, and gasoline is 15 cents per gallon more expensive than consumers expected.

Weaker economic conditions and higher prices have led to a serious decline in consumer confidence, as measured by the American Customer Satisfaction Index -- "one of the largest in the 20-year history of the index," as the ACSI describes it.

"There may be more trouble ahead if the slide in customer satisfaction continues," ACSI chairman Claes Fornell says. "Weaker demand could further threaten economic growth in the second quarter and beyond."

Spending for everything from cable television services to Internet subscriptions to hotel stays are all down in a "very large way," according to the ASCI. And that's all bad news for the economy.

"Collectively, dissatisfied customers who reduce or postpone spending are always a threat to short-term economic growth," Fornell adds.

With higher interest rates looming and no sign of peace in Iraq, food and gas prices will continue to rise -- and right now, that's leading Americans to pull back on savings. It's a situation worth watching as the U.S. economy continues to wheeze and gasp its way to something resembling a decent recovery.

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