April 30, 2021 | 09:13
U.S. Personal Consumption (Mar.) — Spring Splurge, For Inflation Too
Bottom Line: American consumers have plenty of momentum heading into the second quarter, but price pressures are starting to stir.
Following the Q1 GDP release, we weren't expecting many surprises in the March PCE report, but there were a few, notably a little hotter inflation. Let's start with headline spending, which rose 4.2%, and a little lighter than expected 3.6% in real terms. This should still allow for a decent gain in Q2 spending, albeit less than the 10.7% annualized rate of Q1, and should keep GDP growth near or above 8% compared with 6.4% in Q1. Real spending is now up 1.4% from pre-virus levels, led by a 16.4% rise in goods but held back by a 5.1% decline in services. Real services did rise 1.7% m/m and should surge as the economy is now more fully reopened compared with last month.
Personal income leaped 21.1% (or $4.2 trillion at an annual rate) largely due to two rounds of stimulus payments and partly to stronger job growth. Households piled up another $6 trillion in savings (annualized), doubling the saving rate to 27.6%. Both income and the saving rate will slide in April, but the accumulated additional savings of the past year is so large (near $2 trillion), that consumers (in aggregate) have plenty of financial firepower to support pent-up demand for some time.
The big surprise in the report was a 0.36% jump in core PCE prices, the most since 2009. This kicked the yearly rate up to 1.8% from 1.4%, moving it above its tight range of the past half year. The shorter-term metrics are also flashing some heat, with the 6-month annualized rate at 1.9% and the 3-month pace at 2.6%. The increase in the yearly core rate was assisted by the slight decline in core prices in March 2020, and will push even higher next month as prices fell 0.4% in April 2020 (the second most on record).
Chair Powell is partly counting on subdued wages to keep the near-term pop in inflation temporary, but that's a little less assured following today's employment cost index report. It showed the headline measure leaping 0.9% (or 3.7% annualized) in Q1, the most in 15 years. This boosted the yearly rate a couple tenths to 2.7%, which is still subdued especially if productivity ramps higher...but not if we see several more quarters of these kinds of gains. It's good news for workers and should support spending, but rising wages may not be so great for the inflation outlook.