The Boock Report

By

Income, spending and inflation

United States

Mostly captured in Friday’s Q1 GDP report, we now see March spending and income data in addition to the inflation read. Spending was flat m/o/m on a nominal basis which was two tenths less than expected and this might lead to a tweak lower in the next Q1 GDP print. Because headline inflation was down by .2%, the real spending figure was up by .3% (rounding). Spending on goods fell while they rose in services and service spending continues to be driven by money spent on healthcare. With respect to income, they were about in line if we include the February revision. Digging within saw private sector wages and salaries that were flat m/o/m but were still up a solid 5.9% y/o/y (just maybe we are on the cusp of higher wages as a lot of evidence is pointing to it). Combining the spending and income data saw the savings rate rise to 5.9%, the highest since August.

As mentioned, the headline PCE was down .2% as energy prices fell for the 2nd straight month as expected. Food prices picked up by .4% m/o/m. The core rate was down by .1% m/o/m but up 1.6% also as expected. Again, services inflation offset durable goods deflation. Bottom line, we’re seeing a moderation in headline inflation because of the base effects of energy prices and now we’re seeing a very modest cooling of services inflation as rent growth begins to slow, particularly in the oversupplied markets of NY and SF. The key question for inflation from here could be on the wage side as stated above and as seen in every single district in the Beige Book just seen.

We know inflation takes on different forms. The massive inflation in the quantity of money printed only showed up in assets over the past 8 years. Consumer prices and wages obviously did not experience it. Are we on the cusp of seeing higher wages that has been anticipated now for at least a year but not seen? The evidence is beginning to build and if the case, the $64k question will be how companies respond, either through higher consumer prices or lower margins.