Incomes rise faster than spending
The worst in rate hikes are likely behind us.
November 30, 2023
Personal disposable incomes rose 0.3% in October, somewhat faster than markets expected. Consumer spending matched market expectations, rising 0.2% during the month. That pushed up the personal saving rate to 3.8%, only slightly above the 3.7% pace in September.
Rising interest rates, dwindling savings and a return of student loan payments put more of a damper on big-ticket items such as vehicles, appliances and housing compared to services. Preliminary data on the holiday season is mixed, but still solid after adjusting for inflation. People are spending more than ever online via their phones.
Spring 2021 inflation
The better news was the data for inflation, which cooled across the board. All measures that the Fed tracks hit their lowest annual paces since the spring of 2021. The three-month moving average, which better tracks the momentum in prices, is at the lowest level since late 2020.
The (PCE) index was unchanged in October after rising 0.4% in September. A sharp drop in goods prices, led by a decline in energy prices, offset a small advance in service sector prices. The index rose only 3% from a year ago, its weakest pace since March 2021. The three-month annualized rate, which is a better measure of momentum, increased at a 3.2% pace, a slight acceleration from the 2.8% over the summer but remains off dramatically from earlier in the year.
The core PCE (excluding food and energy) rose 0.2%, a slight moderation from the 0.3% pace of September. The index rose 3.5% from a year ago after rising 3.7% in September. That is the weakest annual reading since April 2021. Shelter costs, which were surprisingly high in September, moderated during the month. The three-month moving average edged down to 2.4% from 2.5% in September.
The most encouraging news for the Federal Reserve was in the data for what is known as the super core services index. That index rose only 0.2% (after rounding) in October, after surging 0.5% in September. The index rose 3.9% from a year ago, down from 4.3% a year ago in September. That is its weakest pace since March 2021. The three-month moving average cooled to a 2.7% pace, down from 3.8% in September.
We need to see a much more sustained slowdown in inflation relative to wages to restore the purchasing power lost to pandemic-induced inflation.
Diane Swonk, KPMG Chief Economist
Bottom Line:
Incomes and spending have slowed, but not collapsed, as inflation continues to cool. The pace of inflation is still above the Fed’s 2% annual target, but today’s data suggest it is beginning to get inflation under control. We need to see a much more sustained slowdown in inflation relative to wages to restore the purchasing power lost to pandemic-induced inflation. The worst in rate hikes are likely behind us; the next move will be to cut. Fed Governor Chris Waller essentially signaled that yesterday. Chicago Fed President Goolsbee is likely to second that thought. They are the doves on the Fed. Chairman Jay Powell is likely to be more cautious.
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