March 7, 2023
Deloitte Weekly global economic update
In January, something unusual occurred in the US. As we already know, consumer prices climbed significantly more than anticipated while retail sales rose sharply. The two might have been connected. Then, lately, additional information that supports what we already knew was provided. The US government recently released statistics for January on disposable income, personal consumption spending, and the Federal Reserve’s preferred inflation gauge. According to the data, consumer spending accounted for the majority of personal income growth, and the prior deceleration in inflation slowed. The sharp increase in employment and the significant cost of living adjustment for Social Security recipients are probable factors in the increase in income.
Real disposable personal income, which is revenue after taxes and is adjusted for inflation, increased by 1.4% from December to January, the most since March 2020, according to the government (when the first pandemic-related stimulus money was distributed). Wages increased by US$107.4 billion annually in monetary terms (not adjusting for inflation), following a US$43 billion increase in the previous month. This presumably mirrored the rapid increase in job creation. Additionally, Social Security payments increased at an annual rate of US$109.7 billion, up from US$0.7 billion in the previous month’s decline. The one-time 8.7% cost of living change is what caused this increase. Because my mother-in-law continues mentioning it, I am aware that this was a significant event.
Real consumer expenditure, meanwhile, increased 1.1% from December to January. Due to consumers’ preference to save more money, it grew less than real income. The household savings rate specifically rose from 4.5% in December to 4.7% in January. Additionally, the savings rate has increased consistently since it peaked at 2.7% in June.
Real spending on durable products increased by 5.2% between December and January in terms of spending categories. Real expenditure increased by 0.5% on nondurables and by 0.6% on services. Real spending on durable products has increased since the pandemic’s early days by 27%. On the other side, actual spending on services is only 4% above prepandemic levels.
Regarding inflation, statistics on the Federal Reserve’s preferred inflation indicator, the PCE-deflator (personal consumption expenditure deflator), are included in the report on income and expenditures. Compared to January of last year, it was up 5.4%. From a high of 7% in June, that has decreased. Since October 2021, the annual percentage hasn’t been this low. An unexpectedly large increase in prices of 0.6% from the prior month was seen. Since June, it was the biggest rise. Core prices were up 4.7% from a year earlier, up from the 4.6% rate in December and down from the peak rise of 5.2% in September. This is in contrast to volatile food and energy prices, which were excluded from the calculation. The increase in core costs from the prior month was 0.6%.
That final figure is what recently sent markets into a frenzy. It portends ongoing base inflation and portends further Federal Reserve tightening. As Cleveland Federal Reserve President Loretta Mester put it, “In my view, at this juncture with the labor market still strong, the costs of undershooting on policy or prematurely loosening policy still outweigh the costs of overshooting.” Remember that Powell, the chair of the Fed, recently predicted that the road to reduced inflation would “probably be bumpy.”
On the other hand, a pattern does not form in a single month. The unexpected rise in core inflation in January might have been caused by one-off events. To draw inferences, we’ll need to wait for more information. The inflation news caused a decline in US equity prices while a rise in bond yields.
Source: Deloitte Weekly global economic update – Ira Kalish
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