Cooling Inflation, Consumption

Dan North | April 2023
Inflation cooled a bit in February. The headline Personal Consumption Expenditures (PCE) price index rose only 0.3% m/m, less than expectations of 0.4% and half of last month’s 0.6%. On a y/y basis, the price index rose 5.0%, less than last month’s 5.3%, and well below the 7.0% peak reached in June of 2021. The Fed’s favored inflation gauge, the PCE core index which strips out volatile food and energy prices, rose only 0.3% in February, less than January’s 0.5% and a bit less than expectations of 0.4%. On a y/y basis, the PCE core rose 4.6%, down a shade from January’s 4.7%. These numbers will provide some relief for the Fed and support the scenario that there will likely be no hike at the May meeting and perhaps one more 0.25% hike in June.
The same report also showed that consumers are slowing down. Real Personal Consumption Expenditures (after inflation), which drive 70% of all economic activity, fell -0.1% m/m, the third loss in four months. The already gigantic 1.1% gain in January was revised up to an even more gigantic 1.5%, but I still think that number is distorted. On a y/y basis, PCE cooled a bit to 2.5%, and that’s still well below the long-term average of 3.2%. Real disposable income (after inflation and taxes) rose 0.2% m/m and a sharp 3.3% y/y. But without that huge increase in Social Security Cost of Living Adjustment of 9.1% in January, real DPI would be closer to 3.0%.

The Conference Board’s Consumer Confidence survey showed how unpredictable human emotions can be. The survey closed on March 20th, 10 days after the banking crisis started and this series of events:

•       3/8 Silvergate (crypto) shuts down

•       3/10 SVB closed

•       3/12 Signature Bank closed

•       3/14 Moody’s downgrades entire sector, and puts six regional banks on review

•       3/19 USB-Credit Suisse shotgun wedding

•       3/20 First Republic down 90%, even after $30B cash injection


You would think that after all that, consumers would have sharply downgraded their assessment of the current conditions. But instead, they yawned, said “meh” and only marked it down from 153.0 to 151.1. And surprisingly they became more optimistic about the future with the expectations index rising from 70.4 to 73.0. The difference between assessments of the current situation vs. the future remains well into recessionary territory. In the same survey, the share of respondents saying jobs were plentiful declined while those saying jobs were hard to get increased. When this data peaks and starts to go down it indicates a weakening labor market.

Housing prices as measured by the Case-Shiller home price index fell for the seventh consecutive month in January, dropping -0.2%. The y/y rate nationwide fell from 5.6% to 3.8%. When people hear this they often say “Well in my neighborhood, prices certainly aren’t falling.” Of course, they are right depending on the neighborhood – all real estate markets are local markets. As shown in the charts below, on a m/m basis there were big price drops in western cities and increases in eastern cities. The picture is similar on a y/y basis with losses in western cities and big gains in southeastern cities.