Inflations surges, savings plummet

April 26, 2024

The personal consumption expenditure (PCE) deflator rose 0.3% in March, the same as February. The PCE jumped 2.7% from a year ago in March, after hitting 2.5% in February. The three-month annualized pace jumped 4.4% in the end of the first quarter, after cooling to 0.6% in the end of the fourth quarter. That is the wrong direction for the Federal Reserve, which had hoped that inflation would be decelerating by now instead of accelerating.

The core PCE, which strips out food and energy costs, rose 0.3% in March, the same as February. That translates to a 2.8% increase from a year ago, the same as February. The three-month annualized change came in at 3.5% in March, up from 1.7% in December.  

More importantly, core goods inflation, which had been the primary driver of disinflation in 2023 is now moving up again; core goods inflation on a three-month moving average basis rose for the first time since June 2023.

The super core services PCE, which strips out shelter costs and gets to the most wage-sensitive aspect of inflation, rose 0.4% in March, after cooling to a 0.2% pace in February. That translates to a 3.5% increase from a year ago, up from 3.4% in February. The three-month annualized pace jumped 5.5% in March, several multiples of the 2.2% pace in December.

The super core has held in the mid-3% range for the last five months and appears to be forming a floor under overall inflation. Gains in the super core were broader based than they have been in recent months. That is a sign that inflation is getting stuck above the levels the Fed considers consistent with price stability.

Personal consumption expenditures held up much better than disposable incomes after adjusting for inflation while the saving rate plummeted. The saving rate fell to 3.2% in March, its lowest pace since the fall of 2022, when consumers tapped savings to offset the burn of a more searing inflation.

Much of the excess savings generated by the pandemic has been drained, although consumers are still carrying a lot more in their deposit accounts than pre-pandemic. What they have is earning interest.

Separately, debt loads have moved up but remain low for most households due to fixed rate mortgages. Delinquencies have moved up for subprime borrowers and younger households, but not resulted in the same kind of defaults we saw in the past. That is mostly because unemployment remains extremely low; it’s easier to juggle debt payments, even if they are late, when you still have a job.

The forbearance that was instituted to keep households from defaulting at the onset of the pandemic have been rolled back. However, the full boost to delinquencies triggered by a resumption of student debt is a bit hazy as the impact delinquencies have on credit reports will not show up until the fourth quarter of this year. Student debt has historically been the driver of delinquencies and default, although the administration has forgiven some debt and made it easier for households to service that debt than in the past.

Spending on services remained particularly elevated in the first quarter, despite a slowdown in March. The first quarter marked the second quarter in a row when services dominated spending gains and, not surprisingly, created the highest floor under service sector inflation.

The statistical agencies are struggling to get the seasonal adjustment of the data correct in the wake of the stop/go changes in activity emerging from a pandemic. That would suggest that actual inflation did not improve as much as reported in the fourth quarter, while the deterioration in the first quarter was not as bad as reported. The Fed is well aware of that “residual seasonality;” it is the primary reason officials were cautious in popping Champagne corks and prematurely cutting rates when inflation cooled in the fourth quarter.  If we split the difference, inflation is still too hot to cut rates.