Raging inflation is a tough nut to crack for income.
By Wolf Richter for WOLF STREET.
Consumer spending, adjusted for inflation, is now affected by sharp falls in prices for fuel and durable goods and sharp increases in prices for services. Inflation continues to rage in services, even as the prices of goods have fallen. I discussed these PCE price indices here a minute ago. So consumers are paying less for many goods than they were a few months ago, but they are paying much more for services. About 62% of what consumers spend goes to services.
Expenditure on servicesunadjusted for inflation, it jumped 0.5% in December versus November and 8.7% year over year, according to personal consumption expenditure (PCE) data released today by the Bureau of Economic Analysis.
But adjusted for inflation by the PCE price index for services, “real” spending on services was flat for the month and was up 3.3% from a year ago – 3.3% is decent growth in real spending. Services include housing, utilities, insurance, health care, travel reservations, streaming, subscriptions of all kinds, entertainment, repairs, cleaning services, haircuts, etc. On this inflation-adjusted basis, spending on services is still well below its pre-pandemic trend:
Goods: Prices drop, demand falters after pandemic binge.
Spending on durable goods, not adjusted for inflation, it fell 1.9% in December compared to November and was up just 3.2% year over year. Durable goods include new and used vehicles of all kinds, appliances, electronics, furniture, etc.
Adjusted for inflation with the PCE price index for durable goods, “real” expenditure on durable goods decreased by 1.6% in December compared to November. Spending fell less than it did when it wasn’t adjusted for inflation because prices fell, including prices for used vehicles.
Year-over-year, inflation-adjusted, spending was up just 1.8%, coming off the pandemic binge and is back on trend. This was indeed a massively overstimulated boom in buying things:
Spending on non-durable goods, uninflation-adjusted, it fell 1.4% for the month, on a mix of falling prices (gasoline prices plummeted, but food prices rose) and falling demand. Year over year, spending increased by 5.6%.
Adjusted for inflation, spending on non-durable goods fell 0.4% month-on-month and is now negative year-on-year (-0.8%).
Non-durable goods are dominated by food, fuel and household items. Spending, after the stimulus-fueled binge of the pandemic, is still above the pre-pandemic trend, but is returning to it:
Overall growth in “real” spending: slowdown.
Overall consumer spending on goods and services, unadjusted for inflation, fell by a hair for the second consecutive month, but was still up 7.4% year on year.
Adjusted for PCE inflation, total consumer spending on goods and services fell 0.3%, the second consecutive month of declines, and increased 2.2% year over year:
“Real” Income Without Government Transfer Payments: After the Inflation Plunge, not much recovery.
Adjusted for PCE inflation, income from all sources except government transfer payments (social security benefits, unemployment insurance, stimulus payments, welfare, etc.) exceeded PCE inflation for the sixth consecutive month , gaining 0.2% for the month.
But this measure of income collapsed in the first half of 2022 as inflation hit it. Raging inflation is a tough nut to crack for income. You can see the cliff dive here in the first half of 2022, which has pushed it well below its pre-pandemic trend. Over the past six months, real personal income excluding transfer payments has improved slightly, but has actually fallen further compared to the pre-pandemic trend. Someone is paying for this inflation, apparently:
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