Personal income decreased 7.1% in February, while personal income after tax decreased 8.0%. The main driver was a 27% decline in transfer payments as stimulus payments were distributed to many households in January but not in February. In February, earned income was unchanged from January. Personal income after tax rose 11.4% in January.
Consumer spending fell 1.0% in February. Spending on services increased 0.1%, but spending on durable goods decreased by 4.0% and spending on durable goods decreased by 2.7%. Consumers have cut somewhat as fewer stimulus payments are coming out. Winter storms have also been a burden in some parts of the country.
With income well above spending, the savings rate fell from nearly 20% in January to 13.6% in February. However, with stimulus payments and limited spending options, the savings rate is still well above the pre-pandemic 7% to 8% rate.
The Personal Consumption Expenditure Price Index (PCE) rose a modest 0.2% in February, while the core index (excluding volatile food and energy prices) rose just 0.1%. On an annual basis, headline PCE inflation was 1.6% in February, compared with 1.4% in January. However, core PCE inflation fell from 1.5% in January to 1.4% in February.
With inflation moderate, real disposable income after taxes fell 8.2% in February, while real consumer spending fell 1.2%.
Personal income and consumer spending have experienced enormous fluctuations in the past year due to the pandemic and sporadic economic stimulus payments. Persona’s income declined in March 2020 as job losses due to the pandemic began and increased in April with the first round of stimulus payments and the increase in unemployment insurance benefits. Personal income then declined later in the year as the stimulus effort eased, but rose in January 2021 with a second round of stimulus payments. It then fell again in February, but will rise even further in March with new, larger stimulus payments as part of the American rescue plan.
Consumer spending declined in March and April 2020 as consumers stayed home and stores closed. They recovered in the summer and businesses reopened, stimulating incomes. Another round of stimulus payments resulted in spending in January slightly above pre-pandemic (pre-inflation) levels, although spending declined slightly in February.
Consumer spending growth will be very strong through the end of 2021 and 2022. Consumers will try to spend on services in particular as vaccination efforts allow more activity. Stimulus payments, large job increases, low interest rates and high savings will fuel consumer spending.
Inflation remained low in February and core PCE inflation slowed year over year. Inflation will rise year over year in the next few months based on comparisons with 2020, when prices fell in the first few months of the pandemic. Inflation will then slow down a little later this year as these comparisons work out of the data. Inflation will then pick up somewhat in 2022 as a stronger economy gives companies more pricing power.
The Federal Reserve wants inflation to average 2% using the PCE price index. Since inflation has been well below 2% for the most part over the past decade, the central bank wants inflation to stay a little above 2% over a longer period of time. The Fed has announced that it will not raise the key interest rate until inflation has remained constant at 2% and the labor market is fully employed. PNC does not expect the Fed Funds Rate to increase from its current near zero range by the end of 2023. Although inflation will increase somewhat, it will remain well contained for the next few years.