Inflation-Adjusted Spending Declines Most Since September 2009: Stagflation Coming?

Today’s Personal Income and Outlays report shows consumer spending rose less than economists predicted and far less than inflation. The result is a big decline in real spending. Economists surveyed by Econoday missed the mark once again.

Inflation is nearly at the Fed’s 2.0 percent target, up a sharp 3 tenths to 1.9 percent for the PCE price index which is the strongest rate since April 2012. The monthly gain, reflecting rising energy costs, rose an outsized and higher-than-expected 0.4 percent for the highest reading since February 2013. But the core, which excludes food and also energy, held steady at 1.7 percent though the monthly rate for this reading did rise 0.3 percent which is the largest increase since January last year.

Turning to spending and income, personal consumption expenditures could muster only a 0.2 percent gain, 1 tenth below the Econoday consensus in a marginal gain that belies the enormous strength underway in consumer confidence. And when adjusted for inflation, spending fell 0.3 percent for the largest drop since September 2009.

But income is solid, at a monthly 0.4 percent with the wages & salaries component also rising 0.4 percent. The savings rate steadied in the month, up 1 tenth to 5.5 percent.

The PCE price index will put the pressure on the Fed to raise rates at the mid-month policy meeting. Though it’s not quite at target, its clear upward trajectory makes a successful breach all but certain. Turning back to spending, January’s weak opening points to downward revisions for first-quarter GDP estimates.

Energy Related

On February 14, I wrote about the PPI for January in PPI Spikes 0.6% in January, Largest Jump in 20 Months: Start of Inflation Run? Will February Repeat?

Please take a look. The price spike was a delayed reaction to a November-December energy price surge.

Here is a weekly crude chart from today.

Crude may go up or down from here. I cannot say which. But the big jump in inflation is related to an energy surge months ago.

This report will have some writers talking about stagflation once again. If energy prices rise, and housing tumbles, they could be right.

Preempt Trump

Did the Fed have an advance copy of this report yesterday as part of its preempt Trump effort? For further discussion, please see:

1. March Rate Hike Odds Surge to 80 Percent: New Standard for “Surprisingly Strong” Economy
2. Trump’s Speech: Good, Bad, and Ugly Point-by-Point; Was Trump Preempted by the Fed?

Mike “Mish” Shedlock