Spending, incomes and inflation all notched higher in October

November 27, 2024

Disposable personal incomes rose 0.4% in October after adjusting for inflation, the largest increase since January. Consumer spending rose 0.1% on an inflation-adjusted basis as the personal saving rate rose to 4.4% after falling to a two-year low last month. Gains were concentrated in services as spending on nondurable goods fell. Spending on big-ticket items, which often require financing, rose for the second month in a row.

The personal consumption expenditure (PCE) price index, rose 0.2% in October for the second month in a row. That was largely in line with expectations and pushes up the year-over-year measure to 2.3% after it dipped the previous month. For the fourth quarter, yearly inflation comparisons will be harder because of the progress made late last year.

The Federal Reserve’s preferred measure of inflation, core PCE, came in at 0.3% in October for the second month in a row; that measure strips out volatile categories like food and energy and translates to 2.8% year-over-year, up slightly. The bigger concern for the Fed is that the momentum on core inflation is moving in the wrong direction: up. The three-month annualized pace of core PCE rose to 2.8% in October from 2.4% in September.

The super core services PCE, which includes core services outside of housing, rose 0.4% in October from 0.3% in September, the hottest pace since March. That brings the year-over-year rate up to 3.5%.

The largest sticking point in services prices during the month of October was financial services. Portfolio management and investment advice fees surged 3.5% last month, the largest increase since April. Financial services overall have risen 7.3%, the hottest pace in more than two years. Financial services have now eclipsed insurance costs on an annual basis since April. Insurance costs have been a main driver of services inflation but have cooled in recent months. October ran at 0.3% for the third month in a row; the annual pace declined to 4.3% from 4.5%. Incidents like hurricanes affect insurance with a lag, so they won’t add upward pressure to costs until 2025 and 2026.

Transportation costs jumped across the board but were concentrated in airfares, which rose 1.5%. That is down from 2.0% last month, but still well above the negative readings earlier this year. Outside of airfares, motor vehicle maintenance and repair costs jumped 1.1% after increasing the same amount in September. That was likely due to costs associated with repairing vehicles after storms.

Next in line were social services, up 0.6% after increasing 0.5% and 0.7% the previous two months. The main drivers in October were care facilities for mental health and homes for the elderly, which jumped 0.9% and 0.5%, respectively. Elder care costs are affecting many families as older millennials take care of both children and parents. Costs for senior homes has risen 9.6% year-over-year, the largest reading going back to 1987. Nursing homes, which fall under healthcare inflation, rose 0.7%, the largest increase in almost a year. Childcare costs rose 0.2% after jumping 0.4% last month. Childcare has been going up since the pandemic and is up another 6% for the year. Our own Parental Work Disruption Index shows the hours lost to childcare have risen considerably since the pandemic.

Recreation services increased 0.6% in October after adding 0.2% in September. That was driven by a 1.2% increase in gym services, amusement parks, movie theaters, sporting events and museums.

Healthcare stood out as one of the only areas of cooling in the services sector, gaining only 0.1% in October after rising 0.3% in September.  A negative -0.1% reading in outpatient services offset a small increase in hospital fees.

The upward pressure on service sector costs in being tempered by falling goods prices, which slipped -0.1 for the sixth month in a row, keeping prices solidly in deflationary territory at -1.0% year-over-year. The potential for new tariffs poses a risk to goods deflation but would not take effect until late 2025 or 2026.