U.S. consumption down temporarily and inflation tame in February, but both poised to rise in coming months

U.S. consumption down temporarily and inflation tame in February, but both poised to rise in coming months

*Personal income and spending dipped in February following robust gains in January, reflecting the timing of the government’s distribution of stimulus checks and the severe winter storms, while consumer inflation measured by the PCE price index rose modestly. In coming months, consumption is projected to surge as the economy reopens and consumer inflation will rise, reflecting the base adjustments from their monthly declines in March-April of 2020.

*Real disposable personal income fell 8.2% in February following an 11.1% rise in January. Even with this decline, real disposable personal income is up 3.34% yr/yr, as declines in wages and salaries related to higher unemployment have been more than offset by government subsidies (Chart 1). Incomes should jump further, reflecting the government’s latest round of $1,400 checks and be supported further by job gains.

*Real consumption receded 1.2% in February following an upwardly revised gain of 3.0% in January (from +2.0%). Consumption remains 2.1% below a year ago (Chart 2). Services spending dipped only 0.1%, while real spending on goods fell, but by less than half their gains in January (durables: -4.6% following +7.8%; nondurables: -2.5% following +5.5%). See Chart 3.

*Personal saving declined from the spike in January, reflecting the sizable February monthly decline in disposable income, but it remained elevated and added to the stock of savings that exceeds pre-pandemic levels (Chart 4).

*The PCE price index rose 0.2% in February following 0.3% in January, leaving yr/yr headline consumer price inflation at 1.6%, while the core PCE price index rose 0.1% following a rise of 0.25% in January, resulting in a slight dip yr/yr to 1.4% (Chart 5). The PCE price index for energy goods and services rose 3.8% in February following a 3.3% rise in January, lifting the yr/yr change 1.2% above year ago levels.

Similar to other monthly indicators of industrial production and housing activity, consumption in February was hit by severe winter storms. However, spending is expected to grow strongly beginning in March: the economy is reopening and powerful cyclical factors (disposable incomes, jobs, and confidence) should unleash pent-up demand.

Chart 1. Real personal disposable income

Chart 2. Personal Consumption Expenditures

Chart 3. Consumption of goods and services

Chart 4. Personal Saving

Chart 5. Headline and core PCE consumer price inflation

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

Member FINRA & SIPC
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