Personal consumption expenditures decreased on a month-to-month basis, while wages in the private sector continue to increase
Consumers considerably slowed their spending in February, but not enough to deter the Federal Reserve’s plan to continue raising interest rates in the coming months.
U.S. households reduced their spending in February to 0.2% from a revised climb of 2.0% seen in January. The Fed’s favored measure of inflation, the personal-consumer expenditure (PCE) price index, cooled down in February to 5.0% after it rose to a revised 5.3% in January according to the personal income report released by the U.S. Department of Commerce on Friday. The release also showed an increase in personal savings to 4.6% in February after a revised 4.4% in January – the highest since March 2022.
With prices still high, the report shows that consumers are taking note and not only slowing their spending compared to January’s vigorous outlay but also saving more. Inflation remains at an annual rate of about 6% – high enough above the desired 2% benchmark to justify another rate increase in May.
“Today’s report shows the economy was still growing in the first quarter and inflation is still a problem,” said Robert Stein, deputy chief Economist at First Trust Advisors L.P. “The Fed would like to see more progress on bringing down inflation before it ends the cycle of rate hikes.”
Stein adds that the good news is that private-sector wages and salaries grew faster than inflation for the eighth consecutive month.
Personal income decreased to 0.3% in February compared to 0.6% in the month before. The core personal-consumer expenditure price index, which excludes food and energy, fell to 4.6% in February from 4.7% in January compared to a year earlier.
Wage growth has continued despite the Fed’s efforts to slow the economy. With a boost in wages and salaries increased in services-producing industries and government, real disposable personal income has increased by 0.2% for the eighth straight month. In February, total private sector wage and salary compensation increased by 0.3%, while the 1.0% increase initially reported for January was revised down to a 0.9% increase.
In February, both spending on goods and spending on services declined by 0.1%. A decrease in motor vehicles and parts was partially counterweighted by an increase in gasoline within the goods category. Surprisingly, the greatest contributors to the decline in services were food services and accommodations which were the biggest contributors in January when people were traveling and going to restaurants the most.
Business continues to be strong at Rolo’s restaurant in Queens, said Tony Milici, the 28-year-old bar manager.
“We have been very lucky to catch a lot of popularity coming out of the pandemic,” he said. “We have been making nice cocktails with expensive ingredients in Queens, and charging what they should cost so the house makes money, and it actually works here.”
In February, consumers spent $17.1 billion in housing and utilities, versus $8.8 billion in January – a significant increase. Food prices also increased 9.7% whilst energy prices increased 5.1%.
The Fed still has a lot of work to do, the core PCE increasing less than anticipated in February. This means The Fed must exert additional effort to return inflation to its 2% target.
The data released on Friday doesn’t show any impact yet from the banking crisis that erupted mid-February. The Fed did raise by a quarter point the interest rates – currently at 4.75% to 5.00%.
“Inflation is quite clearly declining, and we expect it will continue to decline through 2023 and 2024,” said Hugh Johnson, chairman at Hugh Johnson Economics LLC. Johnson added that the inflation numbers still give justification to the Fed to raise by at least 25 basis points “and then holding rates unchanged through 2023.”