Inflation isn’t going to just vanish: 62% of consumer spending went to services where demand is growing and where inflation is raging.
By Wolf Richter for WOLF STREET.
Consumer spending on services jumped by 0.7% in November from October, seasonally adjusted, and by 8.9% from a year ago, according to the Bureau of Economic Analysis today. Services accounted for 62.1% of total consumer spending: insurance, healthcare, housing, travel bookings, entertainment, repairs, cleaning services, haircuts, etc.
Adjusted for inflation, so “real” consumer spending on services rose by 0.3% in November from October, and by 3.5% year-over-year. The last time before the pandemic when real spending on services grew at that year-over-year rate was in July 2015. Demand for services has been relentlessly strong, despite inflation and despite the Fed’s efforts to tighten and thereby lower demand.
Spending on services has easily outrun inflation that continues to rage in services, and so this demand for services continues to provide further fuel for inflation in services:
But “real” spending on goods fizzled.
Spending on durable goods, not adjusted for inflation, plunged by 3.3% in November from October. Durable goods are new and used vehicles, appliances, electronics, furniture, etc.
Adjusted for inflation, “real” spending on durable goods fell less, -1.5% in November from October, due to the steepest drop in durable goods prices in years.
Compared to a year ago, real spending on durable goods was nearly flat (+0.6%). Note the historic stimulus-fueled spike in demand that is now getting worked off. Compared to November 2019, “real” spending on durable goods was still up by 25%!
Spending on non-durable goods, adjusted for inflation, dipped by 0.1% in November from October, and was down 1.5% from a year ago. Nondurable goods are dominated by food, fuel, and household supplies. And it’s still up by 10% from November 2019:
Overall “real” spending growth: slowing.
Overall consumer spending on goods and services, not adjusted for inflation, ticked up 0.1% for the month, but was still up by 7.7% year-over-year.
“Real” consumer spending on goods and services, adjusted for inflation, was unchanged for the month and up by only 2.0% year-over-year.
In the years before the pandemic going back to 2015, real growth of consumer spending of 2% year-over-year occurred only in one month. The rest of the months, spending was far higher. To get to the months with 2% growth and below, we have to go back to 2014.
So the Fed’s tightening has had an impact on consumer spending, and inflation has had an impact as the mood has soured. But recently, it helped that gasoline prices have re-plunged. Nothing turns Americans off more than getting gouged at the pump.
But the slowdown in demand has hit goods, where inflation is already backing off, while growth in spending on services remains robust, and this is of course where inflation is now solidly entrenched.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
So if / when REAL SPENDING SERVICES plateaus, then we know we’re at the precipice of a real recession. My best guess is 6-9 months with a 5.5% FFR & 1st-time unemployment claims of 250K.
Seems to be the consensus among rational observers. We’re within a year of some kind of recession.
David Rosenberg has got some good interviews up discussing where we are in the asset value cycle. Some good historical information on Fed tightening/cutting and where the stock market usually bottoms.
Hussman has a new article out showing how similar this 1 year drop in stock market to past big events. Bottom line is it could be year 1 in a 3 year bottoming process.
I think it’s 9 months of leading economic indicators going negative. Maybe that’s why Congress is trying to goose things with 9% increase in spending. The number one cause of inflation is deficit spending from what I have read.
My impression is Powell is very concerned about housing prices and rents, as this is where most wage earners are getting clobbered–leaving little else to spend. The old food or medicine problem. In San Diego most renters and newer homeowners are paying over 50% of wages for housing and many up to 75%.
Nothing much the Fed can really do to tame inflation and save the economy until housing comes back to earth with wages.
“Nothing much the Fed can really do to tame inflation and save the economy until housing comes back to earth with wages.”
This could take a long time. Property taxes won’t come down until there is a material correction in housing. If you rent, services like yard maintenance and apartment repairs cost a lot these days so landlords can’t just drop rents, and don’t forget about the HOA fees for some landlords that have gone up a lot as well.
Powell blew it when he continued to buy bonds and keep rates low much lot longer than he should have.
“My impression is Powell is very concerned about housing prices and rents”.
Powell was buying MBS till September and still has no plan to sell it outright. He is not even meeting his QT cap on MBS as he is only allowing roll offs. He will certainly not be able to do this when layoffs increase.
so I got a water heater job that never got bid on for duplex rebuild
when I went to plumbing supply store he said he had 4 electric heaters – I bought 2 on spot and said we’d pick up
then I found out NAZI city code required us to pipe pressure valves OUTSIDE
but water heaters are in center of home
I informed owner it was TIME and MATERIAL
and I needed few more fiat $dollars
he’s going after contractor for cost – gonna be over $1k for piping since everything is already FINISHED and ready for final
I agree, he should have been selling mbs in 2020 and 2021 but fed doesn’t like to pop bubbles. So, he could just dump mbs but then he’d come under pressure from the financial classes but it would expedite price discovery in housing, slow inflation in services and then allow organic growth to begin faster.
The greater unspoken mandate is what compels, when things don’t make sense its usually due to a lack of information.
healthcare expenses up through the roof too.
every business segment that is either financed or “regulated” sees massive price increases – healthcare, housing, higher education. the US government is the biggest source of inflation. give us a balanced budget and the excess spending of “other people’s money”. and “future generations wealth” would be gone and the economy could re-build based on real economic relationships of value.
every time i am forced to interact with a government agency, I am reminded of how incompetent they are. the joke is on every hard working american in private enterprise.
Gamete,
The ACA further guaranteed government subsidized private health insurance so they can inflate away as cartels do. Of all ppl Trump tried to force transparency in reimbursement rates of carriers & hospital groups. That effort died a quick death and got very little press.
That would have helped the public understand and would have arguably made it harder for carriers to raise premiums and further cost shifting to the public. The Faustian bargain for ACA shant reach the light of day.
Private sector is pretty bad too-Enron, Wells Fargo,….just to name two…..
But in the private sector those bad apples rot and disappear. In gov they just continue to bloat and suck resources away from more productive uses.
WF buys discounted ‘get out of jail free’ cards with every political donation. Cheaper than getting them in an old Monopoly board game.
They cover all the corners: mortgages. home equity, bank accounts and credit cards with their special stench of fraud. Also ye olde ‘forced placed insurance’ scam when they play a PO Box shell game against your insurer.
The biggest source of inflation came from 40 plus years of tax breaks for the idle class. They blew up asset prices everywhere. The pandemic just lit the fuse. A classic supply collapse inflation. Now the ‘re-set’ is underway on stocks and bonds. When housing finally blows its lid the services sector is going to look a lot less inflated.
“My impression is Powell is very concerned about housing prices and rents, as this is where most wage earners are getting clobbered”
He had better be. If not, we’re sunk. The downturn in rents/housing that doves have been screeching about for weeks in an effort to meme a pivot into existence has moved housing prices only slightly down after years of stratospheric gains. They’re still far too high.
Only way to reduce service inflation enough to get to 2% is a recession. I don’t see one on the horizon.
Increase QT 3X and start selling MBS outright. Let free markets decide all rates. The 10 year will jump to 10% in a week. Inflation targets will be met in 1 month.
The solution is always there. Why do thing the right when there is no accountability for doing it in a wrong way that benefits 1% at expense of 99%.
my rates ARE NOT going down – up up and up some more
booked out since there’s SHORTAGE of skilled labor
want to retire, but need to pad retirement account 1st
Sounds like Joe Saba is back with a new moniker.
RobertM700
Nope, a recession ain;t gonna cut it. You need a depression to make a dent in service inflation.
I am prepared to make the supreme sacrifice to stop inflation: shut down the federal government indefinitely.
Re: Nothing turns Americans off more than getting gouged at the pump.
I’m being turned off at grocery store, feeling very gouged. Between eggs, pizza, veggies and basically anything in a cart, prices are continuing to go up.
lucky for me I only buy booze
I rarely shop at Walmart Supercenter. I went there last week after a 3 month hiatus.
What I noticed was a shocking increase in prices: minimum 25% jump in 3 months on milk, cheese, frozen food, bottled water, you name it.
Then headed over to the automotive department which was even worse.
Speaking of services inflation, the engine light turned on which the OBD diagnostics identified as EGR excessive flow. I figured it is cold so let the mechanic change the VSV valve, the modulator, and the EGR valve altogether ($300 in parts new). Was quoted over $900 total plus tax! Replaced the VSV valve (used) and the modulator (new) myself for $40 and solved the issue.
Yep, food prices are insane and every week some of the items I buy have increased significantly. Add in high gas prices and no one’s got anything left to spend on the goods that’s actually counted by the fed.
It’s absolutely ridiculous. We usually only shop the outside ring of the store (you know, produce, meat, fish, dairy) but for Thanksgiving and Christmas meals and snacks had to venture more into the “processed food” aisles and the prices there are shocking. So many people walking around dazed and I noticed many more people closely checking price tags and comparing prices than ever before. I cannot believe anyone still buys Coca-Cola, the “deals” are now like $5 or $6 for a 12 pack, I remember when it was 4 for $12. I have really cut back my consumption of that, wish I could shake the beer habit too.
Looks like durable goods sales are the odd man out when consumers get stretched. Makes sense because you can delay large purchases. You can’t delay rent/mortgage, food and fuel.
If ther’s going to be a recession, this is where it will start. Or has already.
It is a brave man, in my book, that can present the current data with integrity. You have once again, Wolf, accomplished the feat which, I wager, 99% of your fellow citizens would be unable to accomplish before their personal opinion intruded.
For instance, me.
Who happens to currently suspect that the data, currently, is flotsam, marred by the most extraordinary upheaval of common sense these past, let me try to calibrate, exactly when the MOM data like this meant anything. I think it was sometime 70 years ago while babysitting for the neighbor who had Perry Como and Dean Martin Christmas albums.
OK, you caught me exaggerating, it was 55 years ago or so. Kidding aside.
If I interpret the gist is that inflation in the services sector has become anchored ?
Well, at this time in history, that is the correct response to the 1970’s lower wage cage we, as American people, have been confined. It’s only inflationary if the libertarian winners insist on their profit margins and continue to refuse to pay taxes.
It reminds me of a conversation I had with my friend, who was a brilliant Chemical engineer who grew up in a trailer park in the mid west, the “New Deal” programs fed him and educated him.
His hero was Ron Reagan, a television image. Some issue came up on the news about should we instigate a program that would educate the children that are currently in residence in our country and provide supplement income at the poverty level, which was adjacent to his own predicament.
He said, no. They will only spend it on beer and cigarettes like my family. Since I was trapped in the Andes, it was just one more bizarre psychological experience that leaves an impression on one’s world.
To me, the word, bizarre, has a different connotation than the dictionary proclaims:
” Odd in manner or appearance; fantastic; whimsical; extravagant; grotesque.”
Which was the second definition indicting the difference between the average and people who have been placed a distance from the mean. I’m not talking about some individual within the 1.85 std deviations from the mean. I’m talking about the 2 standard deviations from the mean like Hitler and Einstein and Hawking.
If we are not here to lift each other up, what are we doing?
I am a grateful recipient of an excellent public education and a chemical engineer.
I may be wrong, but I believe from what I could find that medicine is included in health services. If that is the case, then the cost of medicine would be a major driver of the increase. Before COVID a dose of monoclonal antibodies was around $500 now they are nearly $10K. Medicare / Medicaid expenses average nearly 2X per person what private insurance pays, so demographics are also driving some of the increase.
Demographics are having a big impact on the work force and I’m not sure how that will get sorted out over the next few years. Large swath of baby boomers have hit the magic age in the last few years and the coinciding effects of the pandemic sealed the deal. A lot of experienced productive talent has taken retirement and that void is hard to fill. With a re-shoring or near-shoring of industry, we have a big labor/talent gap that needs to be filled.
Wage inflation comes as no surprise.
I think calling it inflation of services is a misnomer. The truth is that wages and salaries in the private sector have been depressed for a long time. This was accomplished by a number of means, one of them being mass immigration. With hard globalization breaking down into regionalism and a lot of people leaving the workforce, all of a sudden wage suppression becomes a lot harder. I see the recent increases in labor costs as a largely natural and necessary process. With all the changes that happened in the last few years, I would not expect them to come back down anytime soon either. And if they do, our country will look a lot more like the third world than it did 20 years ago – some of the coastal metropolises are already getting there anyway.
Everything reverts to the mean given time. In boom times, corporations expand opening new locations and hiring requiring labor. In recession they close locations and consolidate operations to minimize losses, laying off workers in the process.
Corporations are in the process of shifting gears, they have been selling growth and expansion to stockholders to drive stock prices, with much of that growth being financed by cheap borrowing.
Now with sales and profits dropping, and the cost of their debt rising exponentially, they must focus on stopping the losses, which means cutting whatever is not profitable. There is a lemming effect in corporations when they are faced with situations they are not experienced in. Once the cost cutting begins, I believe it will spread and hit the economy much harder than most people now expect.
“Everything reverts to the mean given time.”
What I’d like to know is what the mean would be for the housing market to revert to, given the obscene bubble blown over the last few years.
As Shakespeare noted
” Love’s not Time’s fool, though rosy lips and cheeks Within his bending sickle’s compass come; ”
Seems to mean that, perhaps, it may be a warning about the failure of virtue.
Virtue is the fools errand of history that comes and it goes. Ultimately, determining the course of the future of man’s past.
Hard to find love with too much virtue
Just looked at resale value of my 3 Taylor Swift $399ea (+125 fees) tickets for $2200 each. Now THAT is some kind of inflation!
That is a great tie in to service inflation. Those same “experience idiots” are the ones paying for increased rents to be in the “it” locations, pay surcharge pricing, ect… a lot of service inflation is driven by sheeple…
For that kind of money I’d want to see Elvis, John Lennon and Jim Morrison live.
LOL, I wonder what the price is for tickets to attend performances at the pearly gates? Oh wait, I think I know the answer!
I am looking to cut back on services and food as much as possible. Eating in 100% all winter isy goal. The restaurants are insane right now, and I won’t participate in that gouging anymore. Also looking to cut out a few services and DIY.
The only thing that hasn’t gone up is my dog grooming. Been the same price for years.
After watching a video documentary about the harm that red meat and dairy products do to the human physique, I decided that I wouldn’t start reducing the toxic inputs into my chemical bio-factory until January or February.
Thanks, more for me at better prices as you have shifted the supply/demand curve.
As am I. I haven’t been in a restaurant for 5 years. Not because of the virus but because of their arrogance. The last thing I want to do is go out to dinner.
Since I’ve gotten old, the services industry has become more aggressive.
You mean you don’t like when you pick up a carryout order and the credit card reader asks for a tip, and when you don’t oblige you get a subtle eye roll?
Restaurants!
Yesterday, for the first time in awhile, I took my husband out for a Mexican food lunch in a proper restaurant. It was full at 2:30 pm. We ordered 2 taco salads and 2 Pepsi s.
The bill was $41 with a small 10% tip. The problem: the whole thing! Outrageous prices and the food was almost inedible!
A tiny pre fried tortilla shell, super salty refried beans, a scattering of tiny bits of super salted, oily dried beef, a small garnish of shredded head lettuce, a teaspoon full of premade guacamole, and a spoonful of sour cream. ?? !!! No cheese, no seasonings, no veggies, no flavor other than salt, grease, and beans. And $4 each (!!) for the small pepsi s. This is in Modesto, CA, hardly a high end town.
Never again! For about $5 of ready made ingredients from our closest grocery, Costco, I fixed a generous, gourmet taco salad with all the good stuff, in about 10 minutes at home, today.
Terrible food in crazy expensive restaurants have ruined it for me. That was my last time at going out to eat.
Restaurant prices in Phx are through the roof. As you said, tiny amounts of sour cream and guacamole. Both quality and quantity are way down.
Another place we have gone to now charges $16.00 for a personal size pizza. That is crazy.
We have gone back to living a simpler lifestyle, more having friends over for dinner and less going out.
I made 12 chicken burritos using one Costco chicken, a few cans of beans, chilies, onions, cheese. Makes a great lunch or light dinner.
Taco salad! I haven’t seen one since 1988 — no joke.
There was an interesting op-ed in the New York Times several months back about the future of dining out in America. It was written by a former head chef from some bougie restaurants around NYC. His thesis seemed solid: in post-pandemic America, the working classes will gradually come to eat out less than in decades prior. This is in part because service work sucks, (when I was single, I dated a few different servers/bartenders; they all hate you), and it has become increasingly difficult to find, train & retain talent. The expense of this effort will necessarily increase a restaurant’s overhead, and thus, dining out will become increasingly expensive until eventually it’s regarded more as the luxury that it is rather than the way of life that it’s become.
In the short term, the collective appetite for Frappe’d coffee drinks, pizza pies, eight dollar smoothies or Reagan-era Mexican fare rages on; but even in the comments here, one can detect some wobbles.
In case you’re interested I work part-time at a place where the smoothies are over $11.
Middle TN: went out last night before the storm to a brand new restaurant. 2 sweet teas, 2 rolls of sushi, and wife and I split hibachi steak and chicken with large side of veggies and fried rice. Only $41 plus tip. Food was great. I feel like it was a very fair exchange.
I had a gift card for this place, and we got drinks and two appetizers.
$16 for 6 chicken wings
$16 for a flatbread that had almost no cheese on it.
The local pizza joint sells a dozen wings for $13 and a delicious margarita pizza for $18. It’s two blocks away.
Most restaurants are now over $3 for what amounts to 20 cents of Pepsi/Coke syrup and some tap water injected with carbonation. I only order water now for that reason, they don’t clean the nozzles anyways so that Pepsi is coming with a side of mold.
Your ice has mold in it, too. Almost guaranteed.
Unless it’s something exotic like RC or Nesbit’s or Nehi, don’t ever buy a soda at restaurant. Draught beer on the other hand…
Every time I think of going out to eat I watch an episode of that John Taffer show. I’m in great shape thanks to that!
Meanwhile all of the dives have some annual government permit on their doors signifying they’ve paid off the right people.
Again I have noticed the complaints and little acceptance of why all this is happening.
The US buys lots of stuff from out of country. Things that were labor arbitraged to keeping prices low to us.. Paid for with something those people wanted. We pay generally with energy and food.
The world has never been peaceful for long add in a pandemic and climate change causing supply lines to be disrupted.
Add in a generally overly indebted system that has little or no flexibility.
Then add in governments run by people insulated from the general public due to security, campaign funding and privilege.
None of this should have been unexpected. Pavlov’s dogs have been conditioned to expect that the government and the banks (that they hate) will always be there to print and paper over the excesses and idiocy of not only the leadership but also the followers.
Well, I might be early still but when you live beyond your means and invest in speculation and consumption for a long period, there will come a time of austerity to balance the books. Austerity can come in the form of recession, depression or even inflation. I think we are there.
Get used to much less and longer hours. That’s the consequence of excess speculation and too much debt. Denial isn’t a good plan. Neither is being an Ostrich.
economicminor — I don’t think so. One thing Elon Musk said recently regarding recession chatter which resonated: “it’s been raining money on fools for far too long.”
There are so many right place/right time jockeys running around right now…think about the people you used to know who five years ago didn’t have a proverbial pot; I bet at least some of them have joined the nouveau riche today simply by buying/holding/selling at the right time.
Will the fat boil off? Probably; but there is zero sign of headwinds in the near future. At all. Everything is fine.
David Rosenberg has got some good interviews up discussing where we are in the asset value cycle. Some good historical information on Fed tightening/cutting and where the stock market usually bottoms.
Hussman has a new article out showing how similar this 1 year drop in stock market to past big events. Bottom line is it could be year 1 in a 3 year bottoming process.
I think it’s 9 months of leading economic indicators going negative. Maybe that’s why Congress is trying to goose things with 9% increase in spending. The number one cause of inflation is deficit spending from what I have read.