Disinflation resumes as consumers turn more prudent
- Consumers remain willing to spend, but pricing sensitivity has increased leading to more prudence. Real consumer spending fell 0.1% month over month (m/m) in April, as modest appetite for services was offset by reduced spending on goods. With real disposable income also falling 0.1% m/m, the personal savings rate held steady at a 16-month low of 3.6%.
- Real consumer spending growth slowed to 2.6% year over year (y/y) in April as real disposable income growth cooled to just 1.0% y/y — the slowest pace since December 2022. As we have been stressing, slower labor market momentum will continue to limit income growth and push more families to exercise spending restraint amid reduced savings buffers and higher debt burdens.
- Factoring increased price sensitivity, household spending momentum will gradually cool. We anticipate consumer spending growth around 2.0% annualized in Q2.
- Disinflation momentum resumed in April as the headline personal consumption expenditures (PCE) deflator rose a moderate 0.3% m/m (0.26% to be precise) and the core PCE deflator rose 0.2% m/m (0.249% to be even more precise). As a result, headline PCE inflation held steady at a soft 2.7% y/y (2.65% to be precise) while core inflation held at 2.8% y/y (2.75% to be precise) — its lowest since March 2021.
- Slower consumer spending growth, reduced markups, declining rent inflation and moderating wage growth will support further disinflation even if a temporary plateau forms around 2.7% during the summer. We foresee headline and core PCE inflation ending the year around 2.6% y/y.
- While it’s not unusual for Fed policymakers to be extra cautious when approaching the onset of a new monetary policy cycle, the focus and debate around the timing of the first Fed rate cut has become excessive. Nothing says the Fed should cut at every meeting or every other meeting once the easing cycle starts. We continue to foresee two rate cuts this year in July and November on easing inflation and softening labor market conditions even if the risks of a delayed onset in September are growing.
In the details
Real personal outlays fell 0.1% m/m in April, following a downwardly revised 0.4% gain in March:
- Real durable goods outlays fell 0.1%, following a downwardly revised 0.2% gain in March. Outlays on motor vehicles rose 1.4%, but spending on furnishings and household equipment was near flat while spending on recreational goods fell 1.3%.
- Real spending on nondurable goods fell 0.5% — they have declined three out of the last four months — as consumers pulled back sharply on gas (-2.5%) and clothing purchases (-1.0%) and only spent a tad more on groceries (+0.3%).
- Services outlays was lackluster in April, rising only 0.1% — the smallest gain in eight months. Spending on health care, up 0.4%, led the gains, followed by a small 0.2% advance in spending on housing and utilities. Households had no appetite for travel, leisure and hospitality in April with spending on transportation services falling 0.7%, spending on recreation services down 0.3%, and spending at restaurants, bars and hotels ticking down 0.1%.
Personal income rose a moderate 0.3% in April driven by a modest 0.2% advance in wages and salaries, a 0.3% advance on income receipts on assets, and a 0.3% in government benefits. Disposable income adjusted for inflation fell 0.1%.
On the inflation front, the headline PCE deflator rose a moderate 0.3% m/m (0.26% to be precise) and the core PCE deflator rose 0.2% m/m (0.249% to be even more precise). Forward-looking inflation dynamics are reassuring, and Fed policymakers should focus on the road ahead instead of the rearview mirror. Underlying momentum across categories doesn’t appear concerning, and there is no evidence of a reacceleration in inflation:
- Durable goods prices fell 0.2% on lower motor vehicle and furniture prices.
- Nondurable goods prices rose 0.5% led by higher gas and clothing prices.
- Services prices rose a moderate 0.3% led by higher financial services and insurance prices (+0.8%) and modest gains across food services, accommodation and recreation services prices. Transportation prices fell back while health care services prices only rose a tick.
