Incomes & Spending Fall, Inflation Flares

By Diane Swonk, chief economist, Grant Thornton

Personal disposable incomes fell another 2.8% after adjusting for inflation in May as the boost to incomes tied to stimulus checks paid in March continued to play out. Wages and salaries continued to recover with solid gains in employment during the month. The next round of stimulus will hit in July when middle- and low-income households receive monthly tax-credit checks for children. Those will end in December.

Consumer spending fell an inflation-adjusted 0.4% in May after being revised up for the month of April. A sharp drop in spending on big-ticket durables led overall losses. Supply constraints, long backlogs and price hikes took a toll on everything from vehicles to appliance and furniture sales. Spending on nondurable goods also declined as consumers continued to pivot toward spending on services. Many are still playing catch-up with doctor and dental visits delayed by the pandemic, while spending on travel and tourism is picking up. Las Vegas hotels reported being nearly fully booked for the Memorial Day holiday. Airport traffic at security checkpoints picked up last month. Gains in leisure travel have helped to offset business travel, which is still lagging.

The saving rate fell to 12.4% in May from 14.5% in April. That is the lowest level for the saving rate since before the onset of the pandemic in February 2020; the saving rate then was 8.3%. Stimulus checks, enhanced child tax credits, excess saving and continued gains in employment all suggest that consumer spending will remain well above the precrisis trend through the start of 2022.

The personal consumption expenditures (PCE) index, which more accurately measures inflation than the CPI, rose 0.4% in May from April, slightly less than expected. The PCE rose 3.9% on a year-over-year basis in May. That is the fastest annual pace of PCE inflation since August 2008. Gains were driven by a spike in prices of big-ticket durable goods.

The core PCE (excluding food and energy) rose 0.5% in May and jumped 3.1% from a year ago. That is the hottest core PCE measure since April 1992. A surge in used car prices accounted for the largest portion of the upward move in prices in the CPI in May and showed up in the PCE index as well. Look for goods inflation to abate and the upward pressure on service sector prices to pick up as bottlenecks are resolved and consumers pivot into spending on services over the summer months. Airfares, vacation and vehicle rentals are all rising in price after tanking at the onset of the pandemic.

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