Inflation, as measured by the Personal Consumption Expenditure price index (PCE), rose 0.3% in April, while the closely-watched core PCE was up 0.2% over the month. On a yearly basis, the comparable growth rates were 2.7% for headline inflation and 2.8% for core. All of these rates hit market expectations; see CEA’s thread for details about this and other aspects of today’s report on income, spending, and prices.
In this blog, we get under the hood and examine the components of PCE inflation as well as some trends that may help us understand its momentum. We also look at the real income side of the equation, showing inflation-adjusted gains in after-tax income over the past few years.
Starting with recent trends, there’s been significant disinflation in the PCE price index, as shown in the table below. Its yearly growth rate is down 4.4 percentage points off of its peak in June of 2022. What’s particularly notable, as shown in the next two columns, is that this disinflation has occurred while unemployment has stayed historically low and real consumer spending has strengthened, growing from a yearly rate of 1.7% in mid-2022 to 2.6% over the past year.
It is unusual to get that much disinflation without the economy’s demand side—shown here in the unemployment rate and real consumer spending—taking a hit. In fact, the unemployment rate has been below 4% for 27 months, an over 50-year record. Since most working-age households depend on their paychecks to support their spending, the strong job market has helped to fuel consumer spending, even after adjusting for inflation. Figure 1 shows real consumer spending, which is consistently running above its pre-pandemic trend.
A key factor behind this disinflation has been unsnarled supply chains helping to lower goods inflation. Demand for goods spiked when the pandemic hit, at the same time that supply chains were jammed by the intersection of COVID and this demand spike. As the next figure shows, core goods inflation grew steeply in this period, but has since fallen sharply and has been negative (deflation) in recent months.
Services inflation has remained more robust, partly reflecting strong demand post-COVID once people were once again comfortable interacting with services. The service sector is also more labor intensive than the goods sector and therefore more exposed to labor-cost pressures. As labor supply and demand are in the process of re-aligning in the job market, PCE core services (ex-housing) inflation has also cooled somewhat. However, at 3.4% year over year in April it remains above its pre-pandemic level of roughly 2%. Yearly housing inflation has come down from its peak around a year ago, though it, too, remains above its pre-pandemic level.
Food inflation has significantly eased in the PCE (the PCE food measure covers largely groceries as opposed to restaurant prices, which are considered a service). After peaking at 12.2% in August of 2022, yearly food inflation has slowed to 1.3% last month and -0.3% annualized over the past 3 months. PCE energy prices have been characteristically volatile, falling on a monthly basis from October 2023-January of this year, and then rising thereafter, up 1.6% on average in the last three months.
The figure below breaks out all these contributions to overall PCE yearly inflation. The big picture shows that core goods contribution to inflation has thoroughly faded, and that contributions from food and energy have also significantly eased. Consistent with the Figure 3, housing and core services continue to be the biggest contributors to PCE inflation. As the job market cools (but remains healthy) we expect core services inflation to gradually slow. Housing inflation should also ease over time, given that rental price inflation, which enters price indices with a lag, is significantly down.
But we should not consider inflation in isolation. What matters from the perspective of families trying to make ends meet is wage and income growth relative to price growth. In today’s income data, we can look at, for example, real after-tax income per capita. Though it fell slightly in April (-0.1%), it’s up 0.5% over the past year, and 1.4%, or about $850 (in today’s dollars) since the start of 2023.
As President Biden consistently stresses, prices are still too high and we will continue to aggressively press our agenda to lower the costs of health care, food, energy, child care, and housing. But today’s report shows progress over time on both sides of the equation: lower inflation and rising real incomes. On behalf of American households, our administration will continue to build on that progress.
