Wednesday, August 1, 2012

Brief Look at Income and Spending in June

Yesterday, the government released its estimate of consumer spending and income for June.  The bad news is that consumer spending has been flat recently, but the good news is that incomes adjusted for inflation are rising somewhat, which should help sustain consumer spending down the road (reversal of earlier this year).  The savings rate rose to 4.4%, reflecting in part revisions to previous data (the government made revisions for the past 3 years based on more up-to-date information).  What do we learn from this?  It's more of the same.  No recession barring another shock, but consumer spending should be able to plod along during the rest of the year.  As mentioned in several previous posts, other factors will impact consumer spending including the fiscal cliff and the global economic slowdown.

In addition to income and spending, the report provides what's considered by most to be the best measures of consumer inflation.  Inflation based on the PCE index is now running at 1.5% over the last year, while core inflation (exlcuding food & energy) is 1.8%.  Inflation has slowed from a moderate pace to almost nonexistent in recent months.  In fact, in the second quarter of 2012, PCE inflation was -0.3% (annualized rate) while core inflation was more stable at a 1.8% annualized rate.  Economists tend to be criticized for discussing core inflation; many consider it a way of ignoring higher inflation.  The recent behavior of inflation is one reason that most economists think that it's a better gauge of short-term inflation trends than overall inflation as overall inflation bounces around due to significant fluctuations in food and energy prices while core inflation better reflects underlying trends.  Given that, inflation seems to be running a little low (less than the Fed's target of 2%), but there are no signs of deflation any time soon.  That will probably make the Fed hesitant to engage in QE3 at this time.