Personal disposable income rose 0.2% after adjusting for inflation in March, a slight pickup from the pace of February. Consumer spending rose 0.4% after adjusting for inflation as the personal saving rate fell to 3.1%. That is still higher than the trough we saw in the saving rate in late 2017, but low historically. Much of the rise in the saving rate at the start of 2018 was due to a quirk in the way tax cuts were accounted for in the data. The Commerce Department estimated an increase in income from tax cuts starting in January but many have not see that in their paychecks yet because of the delay in implementing changes at the IRS. Indeed, much of the tax code is still up in the air because of last-minute changes.
Consumer spending picked up on big-ticket spending, including vehicles and recreational goods, which include everything from sporting equipment to motorcycles, bikes and boats. That signals a shift toward discretionary spending. Spending on services jumped but much of that could be attributed to higher spending on electricity and gas; unusually cold weather in parts of the South in March forced many to keep their heating on later than usual.
The personal consumption expenditure (PCE) deflator, which tracks inflation, was stable on a month-to-month basis but reached 2% on a year-over-year basis. That matches the Federal Reserve’s target rate for inflation, adding support to the argument for another rate hike at the June meeting; we will be looking for a signal in the statement after this week’s meeting and in the minutes, which will be released in three weeks.
The core PCE deflator, which strips out the volatile food and energy components of the index, rose 0.2% last month and jumped to a 1.9% year-over-year pace, the highest since January of 2017. A pickup in inflation on services, which are the most sensitive to rising wages, accounted for much of the year-over-year increase; we saw a rise in costs for transportation and hotel rooms. Core inflation is critical because it is one of the best predictors of inflation on a directional basis; it is moving up.
Stronger consumer demand is finally showing up in prices, which underscores a return to normalcy and points to higher interest rates. Very low rates along with low inflation and wage growth were anomalies in recent years.
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