U.S. Inflation-Adjusted Spending Falls as Prices Temper Demand

(Bloomberg) -- U.S. inflation-adjusted consumer spending declined in February, suggesting the fastest pace of price increases in four decades is starting to temper demand.

Purchases of goods and services, adjusted for changes in prices, fell 0.4% from the prior month, following a 2.1% jump in January, according to Commerce Department figures Thursday. Spending on goods settled back after the prior month's surge, while a decline in Covid-19 cases supported a pickup in outlays for services.

The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, increased 0.6% from a month earlier and 6.4% from February 2021, the most since 1982. Unadjusted for inflation, spending advanced 0.2% from January, while incomes rose 0.5%.

The median forecasts in a Bloomberg survey of economists called for a 0.2% decrease in inflation-adjusted spending from the prior month and a 6.4% rise in the price index from a year ago.

After omicron-related volatility in the prior two months, the government's data suggest American consumers are feeling the pinch of the fastest inflation in decades. Continued strength in the labor market -- along with excess savings -- has provided many households the wherewithal to keep spending.

Still, rapid inflation has eroded wage growth and driven up the costs of necessities like energy, food and rent. This comes at the same time as families receive less government pandemic aid, weighing on the prospects for spending.

What Bloomberg Economics Says...
“Consumers pocketed some of their higher wage income in February amid increasing geopolitical uncertainty and rising inflation, even as the latest Covid wave continued to recede.”
-- Yelena Shulyatyeva, economist
For the full report, click here

The acceleration in inflation last month only adds to concerns about the breadth and persistence of price pressures, corroborating calls for more aggressive Fed rate increases. A solid March jobs report on Friday, on the heels of the latest price data, may cement expectations for a half percentage point hike in the Fed's benchmark rate in May.

“It continues to seem likely that hoped-for supply-side healing will come over time as the world ultimately settles into some new normal, but the timing and scope of that relief are highly uncertain,” Fed Chair Jerome Powell said in a speech last week. “In the meantime, as we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief.”

Treasury yields remained lower, the S&P 500 opened lower and the dollar stayed higher following the data. Money-market derivatives left intact pricing for a 70%-plus chance the Fed lifts rates by 50 basis points at its May meeting.

Fed's Challenge

The Fed will have to balance tackling even higher inflation with growing risks of a slowdown in consumption amid rising prices and increased uncertainty.

Inflation-adjusted goods expenditures declined 2.1% from the prior month after a January surge of 5.6%. Spending on services climbed 0.6%, the most in seven months.

The core PCE price index, which excludes food and energy and is often seen as a more reliable guide to underlying inflation, rose 0.4% from the prior month and was up 5.4% from a year ago.

The report largely reflects an inflationary environment before the onset of Russia's war in Ukraine, which has pushed up prices even more. Rapid inflation across the U.S. economy has left households with less cash to spend on discretionary items and services like dining out. And though wages and salaries rose the most in four months, inflation eroded much of the increase.

The personal saving rate -- or personal saving as a share of disposable income -- ticked up to 6.3%, though remains near an eight-year low. When adjusted for inflation, disposable personal income declined for a seventh straight month.

The data precede Friday's March jobs report. Economists estimate employers added about a half million jobs as pandemic restrictions faded. They also see an acceleration in hourly earnings growth and a pickup in labor force participation.

A separate report out Thursday showed applications for state unemployment benefits increased last week from a level that matched the lowest since 1969.