Chart of the Day: Inflation's Income and Substitution Effect on American Consumer Spending

The fundamental dynamic behind price inflation would be a shift in consumer spending pattern. Without corresponding increases in income, consumer price inflation leads to the income and substitution effect.

The income effect from higher prices is to reduce or lower demand.

The substitution effect switches spending to focus on the "needs" rather than on the "wants". 

In short, consumer price inflation reduces disposable income.

As CPI builds, we see the same dynamics unfolding in US consumer spending as exhibited by the chart from Zero Hedge/Goldman Sachs