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Consumers drain savings to spend with abandon

Drop in inflation adjusted incomes helps explain the recent drop in consumer sentiment.

October 27, 2023

Personal disposable incomes fell 0.1% after adjusting for inflation in September, the same as August. The August data was revised up a tick. Inflation adjusted disposable incomes, which also subtract taxes, fell for first time on quarterly basis since early 2022, when inflation was still accelerating rapidly.

The drop in inflation adjusted incomes helps explain the recent drop in consumer sentiment. Consumers lost ground to inflation in the third quarter, despite ongoing employment gains.

Personal consumer expenditures (PCE) rose 0.4% after adjusting for inflation in September, as consumers continued to drain the vast amount of savings amassed during the pandemic. Gains were broad based, with consumers spending on everything from big ticket durable goods to tickets to concerts and sporting events. Taylor Swift has brought her spending magic to the NFL since she started attending Kansas City Chiefs games to watch her rumored boyfriend, Travis Kelce, play.

The savings rate dropped to 3.4% in September, its lowest level since December 2022. That data, coupled with the upward revisions we got to income in 2021 and 2022, suggest that consumers still have a significant amount of excess savings—more than $1 trillion—to blunt the blow of higher rates as we enter the fourth quarter.

Overall inflation was up 3.4% from a year ago, a pace it has been stuck at for the last three months. The PCE index accelerated to a 2.9% annualized pace over the summer, 0.4% faster than we saw in the fourth quarter, buoyed in part by prices at the gas pump.

The core PCE index, which strips out the volatile food and energy components and is the best predictor of where inflation is going, rose 0.3% in September. That translates to a 3.7% increase from a year ago, a slight improvement from the 3.8% pace of August, but still well above the Fed’s target of 2%. The core PCE fared better on a quarterly basis over the summer, which better measures momentum in inflation; it slowed to a 2.4% rate in the third quarter, 1.3% behind the pace of the second quarter.  

The super core services PCE index, which the Fed has focused on more this year because of its link to labor costs, rose 0.4% in September. That is up from 0.1% in August. The super core rose 4.3% from a year ago, a slight deceleration from the 4.4% pace of August. The super core remained relatively unchanged at a 3.6% annualized pace in the third quarter. The Fed would like to see more improvement on that front to know underlying inflation has been fully derailed.

The persistence of inflation, even as it cools is a problem; that is why the Fed remains vigilant in its efforts to fight it.

Diane Swonk, KPMG Chief Economist

Bottom Line:

Consumers remain remarkably resilient and are drawing down on their savings to keep spending going, even as their incomes lag inflation. They still have ample savings to tap to keep spending afloat as we enter the fourth quarter, but consumer sentiment is shifting as they lose ground to inflation. The persistence of inflation, even as it cools, is a problem; that is why the Fed remains vigilant in its efforts to fight it. The Fed is expected to remain on the sidelines at its next meeting on November 1 but will leave the option to raise rates on the table again if needed. 

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Meet our team

Image of Diane C. Swonk
Diane C. Swonk
Chief Economist, KPMG US

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