Spending surges in spite of inflation

Summary

Despite real income growth being strong, real spending is stronger, forcing consumers to dip into savings. In the short run, that's problematic as it keeps pressure on inflation, particularly services prices. But the reach is not sustainable indefinitely amid mounting personal interest expense.

Should old acquaintance be forgot?

If January data were not brought to mind, consumer spending would look stronger and inflation would not look quite so daunting, Still, it is difficult to look at today's personal income and spending report and find indications of a consumer that is chastened by higher financing costs. Even as the path lower for inflation continues to be disrupted, paychecks outpaced price gains with personal income rising 0.5% in March.

Consumers have demonstrated in this cycle that they will continue to spend even when real income is down, but at times like these when real income can be a driver, spending is particularly robust. Nominal spending rose 0.8% for each of the past two months—a feat not surpassed since November 2021. On an inflation adjusted basis, real spending started the year on a dour note falling 0.3%, but since then it has risen 0.5% in back-to-back months.

We learned in yesterday's GDP report that goods spending contracted in the first quarter, but the weakness was mostly in durables, and we now know that weakness was concentrated in January. Real durables rose 0.9% in March after 1.4% in February.

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