Income up strongly with spending positive – but core inflation a bit hotter than expected.
February income grew at a strong 0.8 percent pace while personal consumption expenditures (PCE) was up by a solid 0.4 percent. January PCE was revised upward to a smaller decline and on balance the last two months showed little change overall. Importantly, the February PCE data indicate that the largest component of the economy moved higher again, not a sign of an economic downturn. On the other hand, with income growth faster than spending growth over the past couple of months (even with the February rebound in PCE), it may indicate some hesitancy on the part of consumers (perhaps driven by uncertainty from tariffs).
The Federal Reserve has often stated that it prefers the inflation measures coming from the PCE data, and there was mixed news here. The overall PCE price index rose by 0.3 percent for the month, but the core PCE price index (removing the volatile food and energy components) accelerated to a monthly gain of 0.4 percent – above predictions of 0.3 percent. These monthly increases left the 12-month trend rate at 2.5 percent for the overall measure but pushed the trend rate for the core up to 2.8 percent. There is still little impact from tariffs in these figures – those are likely to occur in coming months.
Neither of these inflation measures showed improvement, and both remain above the Fed’s long-term goal of 2.0 percent trend. There is still lots of data to come before the FOMC’s next meeting in early May, but today’s data on income/spending and inflation suggests that the Fed can remain on the sidelines for a while longer. If the inflation data for March (to be released before the next FOMC meeting) show some slowing, the Fed could consider easing – especially if data on the job market and overall economic activity show deceleration. But even if there are signs of slower economic growth, if the inflation figures before the May meeting move higher (tariffs?), the Fed will be in a difficult position. For now, at least, Fed policy appears to be on hold.
David W. Berson, Ph.D., CBE
Chief US Economist
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