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PNC Chief Economist Gus Faucher: Real Consumer Spending Surged in October,

Michigan Business Network
November 26, 2021 1:00 PM

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Despite Higher Inflation; Personal Income Down Slightly; Consumer Spending Growth to Remain Strong Despite Temporarily High Inflation
  • Personal income rose 0.5% in October, with after-tax income up 0.3%. After adjusting for inflation after-tax income fell 0.3%.
  • Nominal consumer spending rose 1.3% in October, with real spending up 0.7%.
  • The PCE price index rose 0.6% in October, with the core index up 0.4%.
  • On a year-ago basis PCE inflation was 5.0% in October, with core inflation of 4.1%. Both of these were the strongest inflation readings in three decades.
  • Inflation will slow in 2022.
  • Consumers will continue to increase their spending in 2022, despite higher inflation.

Personal income rose 0.5% in October from September, according to the Bureau of Economic Analysis. Labor market income rose 0.8% thanks to job and wage gains, while government transfer payments fell 0.5%. After-tax income was up 0.3% in October as taxes paid increased 1.2%.

Consumer spending increased a very strong 1.3% over the month. Spending on durable goods rose 3.3% as auto sales increased with higher production, while spending on nondurable goods rose 1.6%. Services spending rose 0.9%.

The personal consumption expenditures increased 0.6% over the month, after slower gains of 0.4% in the previous three months. Goods prices rose sharply in October as supply shortages gave sellers more pricing power amid strong demand and gasoline prices rose over the month. However, services prices were up a moderate 0.3% in October, the same pace as in August and September, and down from earlier in the year.

The core PCE price index, which includes volatile food and energy prices and is the Federal Reserve’s preferred inflation measure, rose 0.4% in October from September, the fastest pace since June.

On a year-ago basis, the PCE price index rose 5.0% in October, with the core index up 4.1%. Both of these were the highest inflation readings since 1990.

After adjusting for inflation consumer spending rose a solid 0.7% in October from September, with real after-tax income down 0.3%.

With spending up more than income the personal saving rate fell to 7.3% in October, down from 8.2% in September. After soaring during the pandemic, the saving rate is gradually returning to its pre-pandemic level of around 7.5%.

Watch what consumer do, not what they say. Although consumer confidence has declined in the fall because of high inflation, households continue to spend. And the increase is in real spending—higher volumes—not just higher prices.

High inflation and shortages are drags on consumer spending in late 2021. But the positives for consumer spending growth far outweigh these negatives. The biggest plus is the extra $2.5 trillion that households have saved up since the pandemic started. Household income surged with stimulus payments and increased unemployment insurance benefits, while spending plummeted with consumers unable and unwilling to venture out. This accumulated saving will power spending growth over the next couple of years. Other positives include strong job and wage gains, low-interest rates, and rising household wealth due to higher stock prices and home values.

PNC expects holiday sales to increase 15% in 2021 from 2020, after flat sales last year. About 9 percentage points of the increase in holiday spending this year will come from higher volumes, with about 6 percentage points from higher prices.

Inflation is set to slow in 2022. There have been temporarily higher prices for many goods and some services as demand has picked up more quickly than supply in the aftermath of the pandemic. But many of those supply-chain issues will dissipate as goods demand growth slows and production catches up. In addition, energy prices have appeared to plateau, and are set to fall next year as production increases.

Wage pressures and higher costs will lead to a more sustained acceleration in inflation in late 2022 and in 2023. However, inflation will not move too far above the Federal Reserve’s inflation objective of an average of 2%. The Fed announced earlier this month that is slowing its purchases of long-term Treasurys and mortgage-backed securities, which will gradually reduce downward pressure on long-term interest rates. PNC expects the central bank to wrap up those purchases by mid-2022. PNC expects the Federal Open Market Committee to gradually increase the federal funds rate from its current near-zero level starting in September of next year.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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