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."

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