Income and Spending Steady as Inflation Cools
Today’s personal income and spending report is a policymaker’s dream. Consumer income remains strong, spending is more modest and most importantly core PCE inflation notched its smallest annual gain in more than three years.
For anyone hoping to see a more reserved consumer and a taming of inflation, there was a lot to like in [Friday’s] personal income and spending report for May. The staying power of the consumer remained intact. Personal spending rose 0.2% after a downwardly revised increase of just 0.1% in April. After accounting for what was actually a scant decline in the PCE deflator and some fortunate rounding, real spending rose 0.3%. (…)
Critically though, personal income remained quite strong, rising 0.5% in the month which is a welcome development given that income growth has once again become the primary source of purchasing power for households. The saving rate came in at 3.9%. That is still low by historical standards, but it is the highest since January.
The PCE deflator was essentially flat (technically it fell 0.008%), putting the year-over-year rate at 2.6%. The core PCE deflator added a modest 0.1% in the month putting the annual rate for core inflation also at 2.6% (chart). On an unrounded basis, core PCE was up just 0.08%, the smallest rise since November 2020. Both gauges are above the Fed’s 2.0% target, but core inflation is now showing the softest year-over-year inflation in more than three years, and headline is only a tenth away from its softest pace. It is another step in the right direction in terms of the fight against inflation.
Additionally, services inflation less housing, AKA supercore inflation, is coming to heel as well. For the first time this year, the 3-month annualized growth rate for supercore is below the year-over-year rate. (…)
A policymaker’s dream?
- Nominal expenditures rose 0.25% MoM after +0.14% in April, +2.4% a.r. in the last 2 months, a sharp slowdown from +4.9% a.r. in Q1.
- Real expenditures rose 0.26% after –0.13%, +0.8% a.r. in the last 2 months, a sharp slowdown from +1.5% a.r. in Q1.
- Core PCE inflation was up 0.08% in May, a big relief after +0.28% on average in the previous 3 months. Last 4 months
Maybe it would be best to avoid dreaming, staying fully awake given trends in spending power:
- The savings rate rose from 3.5% in March to 3.9% in May. Absent this, real expenditures would have increased 0.1% in April and 0.5% in May, or 3.7% a.r. in the last 2 months, more than twice the Q1 growth rate.
- Savings rose in spite of strong disposable income growth: +0.46% in May. Last 2months: +2.8% a.r. vs +1.3% a.r. in Q1.
- This in spite of continued above average growth in income taxes: +0.7% MoM in May after +0.6% on average in the previous 3 months.
- Wages and Salaries jumped 0.7% in May and are up 5.5% a.r. in the last 2 months, much slower than Q1’s +7.0% a.r. but still very strong, particularly when considering inflation at 2.6% YoY.
Americans have no reasons to morph from consumers into savers: a good labor market, solid wages, slowflation and solid wealth creation.
GONE FISHIN’!