Saturday, February 25, 2023

Consumer Incomes/Sentiment Still Rising

 Financial FAQs

January consumer spending rose 1.8 percent (orange bar in graph) in a month, while personal incomes rose 0.6 percent in the BEA’s latest personal income (PCE) report out Friday.

This is one more headache for the Fed that wants lower incomes and spending to bring down inflation. But that ain’t happening in January, at least.

From the same month one year ago, the PCE price index for January increased 5.4 percent. Prices for goods increased 4.7 percent and prices for services increased 5.7 percent. Food prices increased 11.1 percent and energy prices increased 9.6 percent. Excluding food and energy, the PCE price index increased 4.7 percent from one year ago.

Inflation is declining, but it still caused financial markets to panic for no real reason. Such a spike in spending (orange bar in the above graph) after two negative months and the concomitant inflation rate is temporary because of the huge 8 percent SocSec inflation adjustment in January.

No wonder consumer sentiments are on the rise. The University of Michigan final monthly survey for February confirmed the preliminary February reading, rising 3 percent above January. They don’t see much of a drop in employment, either, per their graph.


“After lifting for the third consecutive month, sentiment is now 17 index points above the all-time low from June 2022 but remains almost 20 points below its historical average,” said Survey Director Joanne Hsu.

Long-run inflation expectations remained firmly anchored at 2.9 percent for the third straight month and stayed within the narrow 2.9-3.1 percent range for 18 of the last 19 months, per the U. Michigan study.

So much for Fed fears that higher inflation expectations may become imbedded and cause consumers to sustain the high inflation by shopping until they exhaust their savings.

More studies by Federal Reserve economists are showing the Fed’s unrealistic expectations to achieve a 2 percent inflation target, no matter the loss of jobs, economic growth, etc.

Progressive economist Robert Kuttner has just highlighted a Cleveland Fed study by its own staff economists that highlights the consequences of holding to a 2 percent inflation target.

The study, by Randal Verbrugge and Saeed Zaman of the Cleveland Fed, says Kuttner, found that, using the Fed’s own projections, inflation would still be at 2.75 percent by the end of 2025—moderate by historic standards—and reducing it all the way to 2.0 percent would require an unemployment rate of 7.4 percent, more than double the current rate.

Who doesn’t believe that would be disastrous at a time of geopolitical unrest, economic sanctions, and the Ukraine war?

Harlan Green © 2023

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