Key personal income and spending data released Friday came in largely as expected, a relief at a time when markets remain vulnerable to incremental evidence of slower consumption in the world’s largest economy.
Spending rose 0.9% last month, and 0.7% in real terms, government figures showed.
Upward revisions to March’s prints were old news. Thursday’s second read on Q1 GDP showed the personal consumption component rose more than initially reported and retail sales data out last week was likewise accompanied by favorable revisions.
Personal incomes rose slightly less than expected.
The increase in current-dollar PCE was “widespread” across goods and services categories. In services, food and accommodation spending was the standout, along with housing and utilities.
To be sure, all of the numbers represented a downshift from March, consistent with the slowdown narrative, but there were no obvious recession red flags.
On the inflation front, headline PCE prices rose 6.3% YoY, marginally hotter than expected, but the 12-month increase on the core gauge was in line. If you squint, you can see a downtick (figure on the left, below)
Crucially, the MoM read on core was 0.3%, matching estimates. That took some of the edge off April’s core CPI overshoot, although I’d note that the actual print, 0.34436%, was just a few ticks from being a “round up.” The figure on the right (above) shows you the trajectory in “high definition,” if you will.
A generic take might be that Friday’s data bolstered the “peak inflation” narrative at the margins. I’d add a caveat: Anecdotally, at least, inflation may have reaccelerated in May. Gas prices hit new records, PMI subindexes reflected persistent price pressures and shelter costs surely aren’t falling for most Americans. That could all translate into hot prints next month in and around the Fed’s June meeting.
As Jerome Powell put it earlier this month, “this is not a time for tremendously-nuanced readings of inflation.”
The tone of the article presents a fair read on the current state as we know it. The problem for all of us market watchers and the FOMC is that we have likely reached an inflection point, but the path off that is unclear. My suspicion is that when the change really hits, it will be a quick and large adjustment, not a smooth glide path. And that is why many commentors fairly point out that for the FOMC to model and implement a soft or softish landing using monetary policy will be difficult. At this point a short and shallow recession is likely to be a very good outcome down the road.
It seems like the Fed will likely go a little too far in attempting to bring down inflation because in the US, where we print our own currency, if the Fed overshoots into a recession- monetary/fiscal policy is better suited to care of that.
In many ways, since our elected government is not doing much to fix supply shortages, we have to rely on the Fed to try to bring down inflation. However, it seems that it is easier for the Fed to fix a recession than to fix inflation.
With a recession, the Fed has QE/lowering interest rates- which for the common man is much less painful than living with rising interest rates/QT.
Plus- our elected leaders prefer to hand out money to voters than to take money away from voters.
To your last point, I was just thinking how maybe we need to let the Fed determine income tax policy as well. Democrats would appreciate it because then they don’t have to be the bad guy raising taxes. Republicans would appreciate it because it gives them more unelected bureaucrats to use as foils in their campaigns and they are running out of taxes to cut at this point (except, of course, any regressive tax).