With Much Lower Inflation

• After-tax personal income rose 0.3% in April, with a solid increase in wages and salaries.
• Nominal consumer spending rose a big 0.9% over the month.
• Inflation slowed in April, with the overall PCE price index up 0.2%, and the core index up 0.3%.
• Real after-tax income was flat in April, while real spending rose 0.7%.
• Both overall and core PCE inflation slowed in April on a year-over-basis, but both remain well above the Federal Reserve’s 2% objective.
• Consumer spending growth will remain solid throughout 2022, although spending will shift from goods to services.
• The Fed will continue to tighten monetary policy to slow inflation.
• The risk of recession is low in 2022 but is elevated for 2023 and 2024.

The April Personal Income and Outlays report was a very good one for continued economic growth in 2022. Personal income growth was solid, there was a big increase in consumer spending, and inflation slowed dramatically over the month.

Personal income rose 0.4% in April from March, with after-tax (disposable) personal income up 0.3%. There was a large 0.6% increase in wages and salaries, thanks to more jobs and rising wages over the month. Disposable income growth in March was revised somewhat lower, to 0.4% from 0.5%.

Consumer spending rose a very strong 0.9% in April. Spending on durable goods jumped 2.4%, while nondurable goods spending fell 0.1% due to lower energy prices. Consumer spending on services rose 0.9%. Consumer spending growth in March was revised noticeably higher, to 1.4% from the initially reported 1.1%.

With spending up more than income, the personal saving rate fell to 4.4% in April from 5.0% in March (revised lower from 6.2%). This is the lowest monthly saving rate since 2008. The personal saving rate has been trending lower as the economy has been reopening and households have been spending their saved stimulus funds.

The personal consumption expenditures price index rose a scant 0.2% in April, the softest monthly inflation since November 2020. The PCE price index jumped 0.9% in March with soaring energy prices in the wake of Russia’s invasion of Ukraine. The core personal consumption expenditures price index, excluding volatile food and energy prices and the Federal Reserve’s preferred inflation measure, rose 0.3%, the third straight monthly increase of that amount, after running at 0.4% to 0.5% from October 2021 to January 2022.

On a year-ago basis overall PCE inflation was 6.3% in April, down from 6.6% in March. March year-over-year headline inflation was the strongest since 1982. Core PCE inflation was 4.9% in April, down from 5.2% in March and 5.3% in February. The last time core inflation was that strong was 1983.

After adjusting for inflation, after-tax income was flat in April from March. Real consumer spending increased a very good 0.7% in April.

The April personal income and outlays report was very solid for near-term economic growth. Consumers continue to say they’re worried about inflation, but so far higher prices have not led them to cut back on their purchases. There were solid increases in both nominal and real consumer spending over the month. Income growth was OK, keeping up with lower inflation. Wage and salary growth was strong over the month, but a drop in self-employment income was a drag.

The personal saving rate continues to decline. It soared to record highs in 2020 and early 2021 as government transfer payments boosted incomes and households cut back dramatically on their spending during the early stages of the pandemic. The current saving rate is too low to persist indefinitely. But for now, households are now spending down the approximately $2 trillion in excess saving that they have accumulated over the past couple of years, and consumer balance sheets remain in great shape.

Consumer spending gains will remain solid throughout 2022, although the pace of growth will slow. Strong job and wage gains, accumulated savings, low consumer debt burdens, and rising home values are positives for household purchases, while high inflation, rising interest rates, and falling stock prices are negatives. Spending growth will shift from goods to services as the economy continues to reopen and consumers continue to venture out. Additional drags on goods spending are the big purchases households have made over the past couple of years and rising interest rates. The big exception will be motor vehicles; supply problems have weighed on sales, but as the automakers resolve these issues and boost output, households will replace their older vehicles.

The slowing in inflation is very welcome, although headline inflation is likely to jump again on a monthly basis in May with another big spike in energy prices. Inflation is likely peaking on a year-over-year basis in the spring, but it is still well above the Fed’s 2% objective.

PNC expects core PCE inflation to end this year at around 4%, and next year at somewhat above 2%. The Federal Open Market Committee will continue to raise the federal funds rate in an effort to cool off economic growth and slow inflation. The fed funds rate will be around 2.5% at the end of this year and above 3% by mid-2023. The Fed’s hope is that higher interest rates will slow growth and cool off inflation without pushing the US economy into recession. The risk of recession this year is low because of solid fundamentals but is around 40% over the next couple of years because of the accumulative drag from Fed tightening. 

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.