EconoFACTS

March 29, 2024 | 09:57

U.S. PCE Inflation Moderates Even as Spending Jumps

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

PCE inflation moderated in February to 0.3% m/m, coming in somewhat below the consensus forecast of 0.4%, and down from an upwardly revised 0.4% increase in January. Even so, inflation is still not as tame as the Fed would like to trigger an imminent rate cut decision. The three-month annual rate on core inflation is running at an elevated 3.5%, up from 2.9% over the last six months, while the supercore metric, services excluding energy and housing, is even hotter at 4.5% over the last three months compared to 3.8% over the last six months. Headline inflation from a year ago ticked up to 2.5%, in-line with our prior expectations. Driving the price increases last month, energy and goods increased 2.3% and 0.5%, respectively, while services and food moderated to 0.3% and 0.1%. Core inflation, excluding food and energy, slowed in-line with our forecast and consensus forecast to 0.3% m/m from an upwardly revised 0.5% increase the prior month. From a year ago, core inflation slowed to 2.8% from 2.9%, also in-line with the consensus forecast prior to the release.

Personal spending growth jumped a stronger than forecast 0.8% m/m from an anemic 0.2% increase in January. Strong job growth and better weather likely contributed to the spending gains. Real personal spending also increased at a healthy 0.4%, reflecting a strong 0.6% increase in real services spending amid sturdy gains in international travel, financial services, and insurance spending. A 0.1% increase in real goods spending was driven by motor vehicles and parts. The robust spending gain last month forced more households to dip into their savings to fund their shopping sprees. The personal saving rate dropped to 3.6% from 4.1% as spending outdistanced income gains last month.

Personal income growth increased a more tepid 0.3% in February following a strong January gain of 1.0% that was bolstered by one-time cost-of-living social security benefit increases. This was slightly below the consensus forecast of 0.4%, though wages and salaries jumped 0.8% amid solid job growth. Disposable income growth slipped to 0.2% and fell 0.1% in real terms last month, following no change in January. This marks a clear slowdown from the fourth quarter’s real disposable income growth pace, which is expected to weigh more on consumers' willingness and ability to spend in the quarter ahead.

Bottom-line: Despite the monthly moderation in PCE inflation, the upward revisions to prior rates for both the headline and core measures remain a black mark on the Fed’s goal of returning to the 2.0% inflation target. In short, it will take more evidence of inflation moderation in the months ahead to give the Fed the confidence to pull the trigger on its first rate cut this year. Meantime, the strong consumer spending gain last month will likely bolster forecasts of first quarter GDP, while the drop in the personal saving rate points to a spending slowdown in the second quarter.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics