Inflation’s Toll Evident in Real Spending Decline, Income Still Solid


February marked the seventh straight month in which inflation outpaced income, raising doubts about consumer spending stamina. Yet, even with inflation at a 40-year high, the 0.4% drop in real spending in February might be overstating the burden and be more of a reflection of an upward revision that made January one of the best months on record for real spending. Let’s Put the Recent Volatility into Context Consumer spending edged only slightly higher in February, up 0.2%, but after adjusting for inflation, real spending actually fell 0.4% (chart). Inflation continues to be the top threat to consumer spending, and once again both the headline and core PCE deflators rose on a year-over-year basis to a pace not seen since the early 1980s. So is consumer spending being swamped by price growth? As with most things, some context is helpful. The 0.4% drop in real spending in February comes on the heels of an already strong January gain that was revised much higher. In fact the 2.1% monthly jump in real PCE in January was the sixth largest increase in records going back more than 30 years (chart). Of the five months that beat the January increase, four of them were pandemic-related surges tied either to major reopening months or to stimulus payments. READ FULL ARTICLE>>