at this market piece (and justin ho), one of the main points is the disconnect between the evolution of consumption and the rate of inflation in services and everything else. Here are some photos.
figure 1: Total PCE (blue), core (tan), services (green), durables (red) and nondurables (yellow-green) are all shown in Ch.2012$, 2021M11=0. Source: BEA via FRED, and authors’ calculations.
Durable consumer spending is falling fast, as expected by rising interest rates – although they remain above the pre-pandemic trend. Spending on non-durable goods has declined from its peak in 2021M11, roughly in line with the pre-pandemic trend.
Interestingly, the services sector continued to grow in December, at 0.5% m/m (not annualized). Taking permanent income assumptions at face value, this suggests that households assume that incomes are still likely to increase in future years. Consumption behavior is now better modeled using some rule of thumb consumers (ie households consuming all disposable income) with a share between 0.2-0.5. Real disposable income rose 0.2% in December, so I think part of the reason consumption remains strong is that the income outlook for the next few years hasn’t collapsed.
What about inflation?
figure 2: Quarter-to-quarter for personal consumption expenditures deflator (blue), core deflator (tan), services deflator (green), durable goods deflator (red), and nondurable goods deflator (yellow-green) inflation rate. The dashed red line at 2%. Source: BEA via FRED, and authors’ calculations.
One of the big events in 2022 is a reversal in inflation in favor of the services sector. That’s still true, but it’s also important to note that service inflation is also now falling, at an annualized rate of 4.9% q/q.
This has led to a decline in headline PCE inflation (q/q) closer to the 2% target.
