Savings remain low amidst persistent inflation

May 31, 2024

Personal disposable incomes fell 0.1% after adjusting for inflation in April versus a tepid 0.1% advance in March. Consumer spending matched that decline in April after a solid 0.4% advance in March. A sharp drop in non-durable goods, largely clothing and gasoline, more than offset a slight increase in spending on services. Low-income and young consumers have maxed out their credit cards, which is showing up in the earnings reports of many retailers. Some of the country’s largest retailers have announced plans to cut prices to buoy spending at their stores. The saving rate held at the 3.6% pace of March in April. That was the lowest pace of saving since December 2022, when consumers were dipping into savings amassed during the pandemic to offset the burn of a surge in inflation.

The personal consumption expenditures (PCE) index, which the Federal Reserve targets at 0.2%, rose 0.3% in April, the same as March. The index rose 2.7% from a year ago in April, the same as March. Gasoline and service sector prices remain elevated, even as big-ticket durable goods prices continued to fall. Bloated inventories on dealer lots have prompted automakers to increase incentives. The same is true of appliances now that housing activity is once again cooling.

The core PCE, which strips out volatile food and energy prices, rose 0.3% in April. That leaves us at three months in a row of 2.8% year-over-year increases. The core index needs to cool by one third that pace by June to see the year-over-year figures improve. A sharp improvement in inflation starting in June 2023 makes year-on-year comparisons much harder over the summer. Shelter costs remained elevated, with an increase of 0.4%. Shelter costs have remained in that range for more than a year now. Some slowdown in home values and rents could cool those figures in the coming months. However, acute shortages remain; there were some signs of a reacceleration in home values and rents in early 2023.

The super core services PCE, which strips out shelter costs and accounts for half of the core, rose 0.3% in April. That marks a slight slowdown from the 0.4% pace of March but is still too hot for the Federal Reserve. There was some reprieve in vehicle and health insurance costs during the month. Vehicle insurance rose only 0.1% during the month, after averaging 0.5% gains in the first quarter of 2024. Household maintenance and repairs fell 0.5% after two consecutive months of 0.8% advances.

Air fares dropped 3.3% in April, the largest since August 2023. Airfares in the PCE are measured as revenue per mile via the producer price index (PPI) as opposed to average route rates, which is in the consumer price index (CPI). Hotel room rates fell 0.3% during the month. That is the first drop since November 2023 and tracks with CPI measures. However, travel over the Memorial Day holiday hit new records, which could push up those costs again in May.

Household and life insurance continued a sharp upward pace, along with the costs of childcare. Everything from in-home care of children to daycare and nursery schools jumped 0.4% during the month. The cost of childcare was running well above overall inflation prior to the pandemic and has since boiled over for households with children. The costs are impacting the hours that parents can work and their broader participation in the labor force. Millennials, who not only dominate the labor force but make up the largest generation of thirty-somethings we have seen, are struggling the most with both shelter and childcare costs. Childcare can easily cost more than shelter for households. 

Personal care jumped 2.1%, the fastest pace since September 2022. That spans hairdressers to spas, gyms and Las Vegas wedding chapels.