The Personal Consumption Expenditures Index, the Federal Reserve’s preferred measure of inflation, was released on Thursday. Excluding food and energy prices, PCE showed a 0.4% monthly increase and a 2.8% annual increase, as estimated by January’s predictions. Headline PCE, which includes volatile food and energy categories, increased 0.3% monthly and 2.4% annually.
These numbers mean the economy has yet to reach that coveted “soft landing” for inflation. According to the Federal Reserve, we’re still too far from the ideal inflation rate of 2% to ease up on current interest rates, much to the chagrin of those holding on hopes from December’s optimistic reports.
Investors and policymakers will now be watching particularly closely to see if these less-than-ideal trends will continue. Given that volatility is common towards the beginning of the year, it’s hard to predict if the consumer price index, the producer price index, and the personal consumption expenditures price index results for January were a one-off or not.
“I suspect that, for the second year in a row, the January core inflation figures (CPI and PCE) could prove to be the highest monthly readings of the year,” Santander’s chief economist Stephen Stanley wrote on Thursday. “That said, I believe that the late-2023 results exaggerated the progress of disinflation on an underlying basis.”
Consumer confidence regressed in February, as reported by The Conference Board. The Consumer Confidence Index fell to 106.7 in February from 110.9 in January.
“The decline in consumer confidence in February interrupted a three-month rise, reflecting persistent uncertainty about the US economy,” said Dana Peterson, Chief Economist at The Conference Board. “The drop in confidence was broad-based, affecting all income groups except households earning less than $15,000 and those earning more than $125,000. Confidence deteriorated for consumers under the age of 35 and those 55 and over, whereas it improved slightly for those aged 35 to 54.”
Consumers held back on spending this January, increasing only by 0.2% in comparison to December’s rate of 0.7%. Adjusting for inflation, personal spending actually declined by 0.1% in January after an increase of 0.6% in December.
Services, particularly financial services, insurance, and healthcare, stayed strong. Service prices went up by 0.6% every month in January, though this increase from December’s rate of 0.3% is thought to be a consequence of the volatility of service prices towards the beginning of each year due to annual price increases and changes in minimum wage regulations.
Both January and December experienced service price increases of 3.9% compared to the same time last year. Though still high, the PCE index indicates that these rates have been slowing down.
At the personal finance level, Americans are experiencing some wins in the form of savings. The personal savings rate, the percentage of disposable income people save, rose from 3.7% in December to 3.8% in January, reversing a five-month trend of steady or decreasing savings.
On the other hand, though, income largely stayed the same thanks to inflation and higher tax bills.
Personal incomes increased by 1% in January, a jump from December’s 0.3% rate and the biggest monthly personal income increase since January 2023. The wages and salaries that make up almost half of Americans’ income rose by 0.4%, while increases in Social Security benefits and investment returns further boosted incomes.
But inflation and higher tax bills have dampened these statistics. The monthly tax rate increase of 0.5% to 6% from December to January means that personal disposable incomes really rose by just 0.3% after taxes, and with inflation, after-tax income increases were negligible.
The Congressional Budget Office released its 2024 to 2034 Congressional Budget Outlook on February 7th, projecting a federal budget deficit increase from $1.6 trillion to $2.6 across the next decade. Net interest costs, an aging population, and increased federal healthcare costs per beneficiary are expected to be major contributors to the increase.
The projected deficit is smaller than it was last year, primarily as a result of the Fiscal Responsibility Act of 2023 and subsequent legislation, alongside new data on the growing labor force due to higher net immigration. The agency has also lowered its projections for inflation and economic growth, while higher interest rates are expected from 2024 to 2027.
