Personal income rose 0.3% in March, a hair below expectations for 0.4%. Adjusted for inflation and removing taxes, real disposable income was up 0.2% in the month.
Personal spending rose a robust 0.4% in both real and nominal terms in March, as month-on-month price growth was roughly flat. All major components rebounded in March, with real durable goods leading the way (up 1.1%) and non-durable goods and services both up 0.3%.
Price growth in the month was held down by energy prices, which fell 2.8%in March. Still, headline inflation rose to 2.0% year-on-year, hitting the Fed’s target for the first time in a year. Core inflation, meanwhile, rose 0.2% (month-on-month) in March, taking core inflation to 1.9% (year-on-year), its highest reading since January 2017.
The personal saving rate fell two ticks to 3.1%, from a downwardly revised 3.3% in February.
Key Implications
March’s strong spending outturn makes up for the pullbacks in February and January, and sets the second quarter up nicely. With tax cuts continuing to support income, we expect to see spending bounce back soundly, bringing real GDP growth along with it.
Inflation continues to gain traction. Services inflation, in particular, is notable, rising to 2.8% year-on-year – its highest level in nearly a decade. Soft services price growth has been a key reason for inflation’s relative underperformance in the post-recession period, and its re-acceleration suggests that the days of serially-disappointing price growth are numbered.
The acceleration in spending alongside faster inflation will be a point of conversation as the Federal Open Market Committee meets this week to deliberate on interest rates. While the Fed is unlikely to raise the fed funds rate at this meeting, it will set the stage for an increase at its meeting in June.
