U.S. Consumption and PCE Inflation up in June

U.S. Consumption and PCE Inflation up in June

*While personal income simmered to a 0.1% monthly increase in June, personal consumption rose 1.0% (Chart 1), lifting its yr/yr rise to 3.5%, but PCE inflation rose 0.5%, which lifted its yr/yr rise to 4.0% (Chart 2), and cut into real consumption. This report on personal income and consumption is clear evidence that persistently high inflation is cutting into real disposable income and consumption. The 6-month annualized rise in inflation relative to its yr/yr rise highlights the acceleration of consumer inflation (Chart 3).

*The combination of unchanged monthly disposable personal income and the increase in consumption reduced the monthly rate of personal saving to 9.4% (Chart 4), but the cumulative stock of personal savings remains dramatically higher than before the pandemic. Along with disposable income this adds to consumer purchasing power.

*Real consumption rose 0.5% in June. This healthy growth was suppressed by a sizable decline in sales of motor vehicles due to ongoing supply constraints. As a consequence, inflation-adjusted consumption of durable goods fell 2.5% following declines of 0.5% in April and 5.9% in May, while real consumption of nondurables rose 1.9% and consumption of services rose 0.8%. As shown in chart 5, despite its recent months’ declines, real consumption of durable and nondurable goods is far above pre-pandemic levels while spending on services is catching up. In the second half of 2021, consumption is expected to grow, services regaining pre-pandemic levels and goods continuing to increase.

*In the past four months, the PCE price index has risen persistently faster than earlier expected, with monthly increases of 0.5%-0.6% on headline and 0.4%-0.5% on the core measure excluding food and energy. This has had a marked impact on real disposable income and consumption: yr/yr, disposable income has risen 0.8% but has declined 3.0% in real terms; from April through June, current dollar consumption rose 2% (8% annualized) while real consumption rose 0.4% (1.6% annualized). Clearly, inflation has risen higher than earlier forecasts and has persisted longer (we are months beyond the yr/yr base adjustment from the monthly declines in the PCE price index in March-April 2021). We project further increases in employment and wages will contribute to rises in personal income and consumption, but that inflation will remain elevated.

Chart 1: Real Disposable Personal Income and PCE

Chart 2: PCE Inflation – Headline and Core

Chart 3: Core PCE Inflation

Chart 4: Personal Savings Rate

Chart 5: Real PCE – segmented

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

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