Inflation cools, consumers dip into savings

December 20, 2024

The personal consumption expenditures (PCE) index rose 0.1% overall and for the core index, slightly below market expectations after rounding. The data were much cooler than the CPI and PPI reports, which was expected, as they include different measures of some components of inflation, notably in airfares and financial services. Fed Chairman Jay Powell highlighted some of the differences in his comments following the Federal Reserve’s decision to cut rates in December.

The overall index rose 2.4% while the core came in at 2.8%. That is up a tick for the overall index but even with the core pace in October. The math on the year-over-year measures is muddied by a sharp improvement in inflation a year ago but becomes much easier to compare as we move into the start of 2025.

These figures did not come as a surprise to the Fed, which incorporated them in its decision to cut by a quarter point this week; that was accompanied by one dissent and heated debate about whether to cut at all. The Fed expects any improvements we see at the start of the year due to the easier math to be short-lived: It scaled back its trajectory of rate cuts in 2025 to two from four.  

The super core services rose 0.2% from a year ago, the coolest pace since May. The cooldown was driven by a drop in transportation services, which fell 0.5%. That was held down by a 1.4% drop in airfares, which measures revenue per mile in the PCE report. The same figure in the CPI, which measures changes in specific routes, rose 0.4%. during the month. That means consumers did not see that cooling in their own purchases of airline tickets. (I am still in shock over my daughter’s ticket home for winter break.)

Other services prices were warmer. Amusement parks increased 1.2%, which drove recreation services. Hotel room rates rose 3.8% during the month, the largest increase since October 2022, boosted by record Thanksgiving travel. Cruise lines, which enable consumers to avoid higher hotel room rates, posted the largest increases over that week; demand looks strong through December.

Separately, childcare and daycare costs rose 0.6%, and added 6.2% from a year ago. That is the hottest read on those figures since May 2023. Monster storms damaged and wiped-out daycare facilities and schools, cutting into hours worked for parents (notably women) in October and November. Subsidies for low-income households for daycare lapsed in October. There were some funds to replace destroyed daycare facilities in the initial continuing resolution agreed earlier in the week but are up in the air due to infighting in Congress.

Communication services fell 1%, which include wireless and Wi-Fi connections. People are scaling back in those categories as they attempt to make ends meet in the face of other essentials. Financial services increased 0.6%, a slight cooldown from last month, but up 8.4% from a year ago. That is distorted in the data due to high interest rates, something Powell noted in his comments after the rate cut.

The cost of insurance rose only 0.1%, its coolest reading since September 2021, but up 4.4% from a year ago. The cumulative increase in insurance since the onset of the pandemic is much higher, as everyone knows. Look for more increases in insurance costs over the next year, as insurance companies petition states for increases due to recent hurricane damages.

Personal incomes rose 0.2% in November, after adjusting for inflation and taxes. Manufacturing income rebounded with the end to the strike in the aerospace industry. The gains still lagged consumer spending, which rose 0.3% after adjusting for inflation. Gains in consumer spending were dominated by a surge in spending on big-ticket items, from vehicles to furniture, appliances and electronics, all of which were damaged by recent hurricanes. The savings rate moved down a tick to 4.4% in November.

Spending on big-ticket durable goods alone surged by 1.8% after adjusting for inflation, the fastest since May. Inflation-adjusted spending on non-durable goods rose 0.2%, after falling 0.2% the previous month. Spending on services slowed to a tepid 0.1%, half the pace of October. The data suggest that consumer spending will remain a driver of real GDP growth in the fourth quarter, as it was in the third quarter.

The demand for big-ticket items in the wake of storms was so large that it pushed up the prices of many goods and prompted consumers to purchase ahead of additional price hikes in December. The final reading on consumer sentiment today were buoyed by a 32% surge in current buying conditions. Consumers said they were buying ahead of future prices hikes. Inflation expectations one year out rose to 2.8% from 2.6% last month. That is the wrong direction for the Fed and much larger than we saw in anticipation of tariff increases in 2018.

Even tariffs announced on day one of the new administration will take months to implement. The problem is that they are coming on the heels of new tariffs enacted earlier this year and before price stability has been achieved. That is a red flag for the Fed, as it underscores how fragile supply chains still are and how unmoored inflation expectations remain.