Commentary Directory

PCE Inflation Meets Forecasts, Yet Fed May See Hawkish Signs

Jacob Hess
March 29, 2024

After a slightly underwhelming January income and outlays report where consumers appeared to be taking a step back from spending, February data provided a bit of a counter to that account. While personal incomes were up just 0.3% MoM and real disposable income actually declined on the month (down -0.1% MoM), personal consumption expenditures expanded 0.8% MoM and when accounting for inflation were up 0.4% MoM. The consensus estimates expected income to be slightly stronger at 0.4% MoM vs 0.3% MoM reported and consumption to be much weaker at 0.5% MoM vs 0.8% MoM reported. This data lends some credence to the narrative that colder weather in January was had an economically chilling effect and there was a slight bounce from that in February.

Spending was relatively strong across both goods and services with the former up 0.5% MoM and the latter up 0.9% MoM. Goods spending was boosted by a strong increase of $28.5 billion in motor vehicle and parts sales as there was a noted pick up in the sales of new light trucks. Behind that category were gains in every service industry including transportation services up $17.0 billion, housing & utilities up $16.3 billion, and recreation + food services & accommodation up $16.3 billion. US consumers remain committed to portioning a large slice of their budgets to services, and that trend has not really faded away.

The all-important PCE price indexes looked to be mostly nonevents. All of the main rates came in in-line with consensus expectations except for the headline MoM move which was a tick below. The core PCE price index grew just 0.3% MoM which matched consensus projections as did the annual rate of growth at 2.8% YoY. At that rate, the Fed's main gauge of inflation is now at the lowest since March 2021. However, other data points that are key to the Fed are pointing to sticky inflationary pressures. Personal income growth is still strong at 4.6% YoY (though this slowed from 4.9% YoY in Jan), and the annualized rate of average of the last three MoM gains in income is over 6.5%. Similarly, services inflation is sticky at 3.8% YoY in Feb, down only 0.1 ppts from 3.9% YoY in Jan. The annualized rate of the average of the last three MoM gains in services prices is a touch above 4.9%. At the moment, it is base effects that is keeping annual rates on a trend of gentle deceleration while underlying near-term trends are strong.

Nothing summarizes the current consumer landscape more than the trend in the personal savings rate. With consumer spending remaining robust in February, the personal savings rate dropped to 3.6% which was down from 4.1% in January and the lowest since December 2022. It seems that higher interest rates are not necessarily tightening the purse strings of the US consumer despite that being one of the goals of the Fed. This could be a signal that inflation expectations are settling higher than pre-pandemic levels as consumers struggled to shake the feeling that inflation is becoming entrenched. While year ahead inflation expectations have come down from above 4%, they have settled at or just below 3% in the last four months, according to the most recent UMich Index of Consumer Sentiment data. This is slightly higher than the average expectation of 2.64% YoY inflation from 2015-2019.

With all this being said, the Fed should not make any major changes in their position on rate cuts as a result of this report. If anything, it should give a bit of a hawkish tilt to some FOMC members who will want to continue to stress caution when it comes to loosening monetary policy.