Personal income advanced 0.5% in March, spot on with the consensus forecast and nearly double the 0.3% gain in February. The solid gain was driven by the second straight 0.7% jump in wages and salaries amid strong employment gains last month. Disposable personal income, or what’s left over after taxes, increased 0.5% following a 0.2% upturn the prior month. Despite the stronger-than-expected monthly gain, nominal personal income growth was unchanged at 4.7% on a yearly basis.

Continued solid income growth is powering consumer spending. Nominal personal spending rose a strong 0.8%, unchanged from February's pace. Real consumer spending increased 0.5%, also on par with last month. Spending on goods surged 1.1%, while spending on services moderated to just 0.2% from 0.6%. The above-consensus monthly gain pushed the year-ago growth rate in real consumer spending up to 3.1% from 2.3%.

A byproduct of continued strong job and consumer spending growth is still-elevated inflation. The PCE deflator climbed 0.3%, in line with the consensus forecast and unchanged from February's rate. That drove the year-on-year increase up to 2.7% from 2.6%. The core PCE deflator, which excludes food and energy and is the Fed’s preferred inflation gauge, also rose 0.3%, though the year-ago growth rate held steady at 2.8%.

Bottom line: The surprising strength of the U.S. labor market despite rapid interest rate hikes is allowing consumers to keep spending, although households are also relying on savings to support spending with the saving rate falling to 3.2% from 3.6%. The offshoot is that interest rates are likely going to stay higher for longer.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics

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