Personal income edged lower by 0.1% month-over-month (m/m) in February, coming in below market expectations for a 0.3% gain. Adjusting for taxes and transfers, disposable income also declined by 0.1%, following a strong gain in January that was due to the annual cost-of-living adjustment for social security benefits.
Consumer spending advanced by 0.5% m/m in nominal terms, slightly faster than January’s 0.3% pace. However, as in the previous month, nearly all of the gain was attributed to higher prices. In inflation-adjusted terms, spending increased by just 0.1% m/m following no growth in January.
Spending on goods edged up by 0.2% m/m in real terms as purchases of cars and parts rebounded by 4.3% m/m. Outlays on other goods either declined or grew only slightly. Spending on services rose modestly (+0.1% m/m), with higher spending on transportation (+0.7%) and healthcare (+0.3%). However, spending on recreational services declined by 0.4% m/m and spending on accommodation and food edged up only slightly (+0.1% m/m).
The personal saving rate declined to 4.0% from 4.5% the previous month.
Inflation remains persistently above the Fed’s 2% target. Core PCE— the Fed’s preferred inflation gauge— rose by 0.4% in February, matching gains in the prior two months. In annual terms, core PCE inflation was up 3.0%, down slightly from the 3.1% pace seen in January.
Key Implications
Overall, it was a soft start to the year for U.S. consumers. Real spending remained subdued in February, likely restrained by weather-related factors. While spending on autos and parts rebounded, dining out and recreation remained weak, likely due to the weather. With the recent spike in gasoline prices, attention is now focused on the March report. Some rebound in spending is expected with improved weather, but the report will also be closely watched for signs of consumers pulling back on discretionary purchases amid high prices at the pump.
Headline inflation is expected to jump on higher prices in March, however, it’s likely too soon for the second order price effects to show up in core inflation. This is where the uncertainty lies – the longer prices stay elevated – the larger the risks that firms outside of the airlines and transportation industries will begin to pass higher costs to consumers. The U.S. – Iran 10-day ceasefire already seems to be on shaky ground and the uncertainty about the conflict further muddies the water for policymakers. As such, the Fed is likely to remain until there’s more clarity on the effects of the war on both the economic and inflation outlook.
