Core PCE Inflation Falls Back to 2%, Spending Rising Faster Than Incomes as Benefit of Bonuses Fades

Personal income growth slipped to -.1% MoM in April as bonus and stock option gains from the first quarter fade. This follows a revised higher gain of +.8% (previous +.7%) MoM for March. Over the past year, personal income has risen +5.9% YoY, with actual compensation rising +5.2% YoY. When adjusted for taxes, disposable income also fell -.1% MoM in April, but has risen +5.6% YoY. When disposable income is also adjusted for inflation, incomes fell -.4% MoM.

April personal spending rose +.5% MoM (consensus +.4%), an acceleration from the revised higher +.4% increase of March. Spending on services accounted for the majority of the increase. Since spending rose faster than incomes, people were dipping into savings to fund their purchases, and pushing the savings rate back into record negative territory of -1.3% from an improvement to -.7% in March. When adjusted for inflation, spending rose +.2% MoM in April after holding unchanged the prior month. Over the last year, personal spending has increased by +5.8% YoY. Spending is starting out the second quarter stronger than most economists expected, which should help GDP.

Core inflation grew more slowly than expected in April, rising +.1% MoM and declining to +2% YoY from +2.1% the prior month. Core PCE, which excludes volatile food and energy costs, is the Fed's preferred inflation measure. This month's 2% YoY level is the lowest it has been in over a year, and puts it at the top end of what is believed to be the Fed's comfort zone for core inflation. The PCE deflator fell to +2.2% YoY in April, down from an original estimate of +2.4% YoY for March. Unfortunately, headline inflation is likely to remain elevated as food, energy, and imported goods prices continue rising.