January consumption up, accelerating shelter costs boost inflation

*In a sign of the U.S. economy’s resilience and improving ability to navigate waves of COVID-19 infections, consumption rose 2.1% m/m in January following a decline of 0.8% in December. Notably, real consumption jumped 1.5%, reflecting a rebound in motor vehicle and durable goods consumption, while consumption of services lagged, underscored by a pull-back in consumption of high-contact, in-person services reflecting a rise in public health concerns and adverse weather. Inflation continued to accelerate and broaden in January driven by sharp price increases for goods and a continued acceleration in services inflation. Russia’s invasion of Ukraine has put upward pressure on agricultural and energy commodity prices, and raises the risks of further and more persistent increases in headline inflation in the near term. Personal income was flat over the month in nominal terms despite an uptick in compensation of employees as government transfer receipts edged down.

*Headline PCE inflation rose 0.6% m/m and 6.1% yr/yr, with durable goods prices rising 1% m/m in both January and December, lifting their yr/yr increase to 11.7% (Chart 1). Core PCE inflation (excluding food and energy) increased 0.5% m/m lifting its yr/yr increase to 5.2%, the highest annual rate since 1983, driven in part by an acceleration in services inflation. Tenant rent and imputed owner occupied rent, which make up 15% of the PCE price index, increased 0.5% m/m and 0.4% m/m respectively, boosting their yr/yr increases to 3.7% and 4.1% (Chart 2). As we pointed out in “OER, services prices, and inflation”, yr/yr measures of shelter inflation in the CPI and PCE price index are likely to accelerate substantially through 2022 reflecting the lagged impact of the steep rise in market rents and home price appreciation; on a six-month annualized basis tenant rents have increased 4.9%, while imputed owner occupied rent has increased 5.1%.

*Pent up demand and continued supply chain disruptions suggest upward pressures on durable goods prices will persist in the near term. Food prices increased 0.9% m/m, while energy prices rose 1.1% m/m and are poised to accelerate reflecting the lagged impact of increased energy commodity prices in December and the current rise in commodity prices. As spring/summer approaches and the impact of the omicron variant wanes, we expect services inflation, particularly in sectors such as leisure and hospitality, travel, and accommodation to rise driven by a mix of strong demand and accelerating nominal wages.

*Personal income was flat in January: an increase in wages and salaries of 0.5% m/m reflecting increased payroll employment and average hourly earnings was largely offset by a $120 billion annualized decline in government transfer payments to households due to the end of the advance child tax credit payments authorized by the American Rescue Plan (Chart 3). Personal income is likely to rebound in coming months, the omicron variant led to elevated rates of illness associated absenteeism from work, which paired with adverse weather conditions through January contributed to a decline in aggregate hours worked of 0.3% m/m, despite an increase in payroll employment of 470k. Continued nominal wage growth, payroll employment gains, and increases in aggregate hours worked should support nominal personal income growth going forward. After adjusting for inflation, personal income declined 0.5% m/m in January, and has fallen for six consecutive months, although households continue to sit on a large buffer stock of excess savings built up over the course of the pandemic. The personal saving rate fell to 6.4% in January suggesting households are beginning to draw on these excess savings to smooth consumption.

*Nominal consumption jumped in January underpinned by a 13.3% m/m increase in motor vehicle and parts consumption of $92 billion annualized. This represents 27% of the total increase in nominal personal consumption in January (Chart 4). Goods consumption rose 5.1% m/m and are well above both their pre-pandemic level and trend. Services consumption in comparison rose 0.5% m/m with consumption of recreation services declining 0.25% and consumption of food services and accommodation declining 1.4%, reflecting the impact of the omicron variant and winter storms.

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Chart 2.

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Chart 4.

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Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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