Income from all sources minus government transfer payments outruns inflation again.
By Wolf Richter for WOLF STREET.
So here we go again. Every five years, the Bureau of Economic Analysis adjusts its Personal Consumption Expenditure data going back years as part of its “comprehensive update of the National Economic Accounts.” We’ve already seen the effects of these adjustments on the PCE inflation indexes, which were revised substantially higher for the past two years (I show the old data in green, overlaid with the new data in red here).
In terms of the inflation adjustment of consumer income and spending, the BEA, when it released the August figures today, also shifted the inflation adjustment from “2012 dollars” to “2017 dollars,” which obviously changed all the dollar figures for “real” income and “real” spending in a massive way.
The income from all sources but without transfer payments from the government (so minus Social Security benefits, unemployment insurance, VA benefits, etc.) has been outrunning inflation for months, after a steep setback last year. So this is income from wages and salaries, interest, dividends, rental property, and personal business, but without transfer payments.
Adjusted for inflation, so “real” income rose by 0.1% in July from June. The three-month moving average, which irons out the monthly ups and downs, also rose by 0.1%, and was up 2.1% year-over-year: Consumers again out-earned inflation.
But in the first half of 2022, consumers’ real income dropped sharply for six months on the surge of inflation, and when real income began to rise, it took another six months to get back where they’d been at the beginning of 2022, and then languished there for months. In April 2023, real income finally started setting records again and has continued to do so every month since then.
This income growth is a function of rising employment, rising wages and salaries, rising interest incomes, rising rental incomes, etc.
“Real” consumer spending (adjusted for inflation and for seasonal factors) rose 0.1% in August after the 0.6% spike in July.
The three-month moving average, which irons out the drama of those monthly ups and downs, rose 0.3% for the month and 2.3% year-over-year. This roughly matches the average growth of the Good Times before the pandemic.
You can see the acceleration of growth over the past few months:
“Real” spending on services (adjusted for inflation) rose by 0.2% in August from July. The three-month moving average rose by 0.3%. Year-over-year, real spending on services rose by 2.4%.
This inflation-adjusted growth of spending on services is astonishing because it’s in services where inflation is still red hot: Core services inflation rose by 5.1% in August, according to the PCE price index.
Not adjusted for inflation, spending on services spiked by 7.4% year-over-year!
Services, which accounted for 65% of total consumer spending in July, include housing, insurance, healthcare, travel bookings, concert tickets, streaming, subscriptions, repairs, cleaning services, haircuts, etc.
“Real” spending on durable goods (adjusted for inflation) fell by 0.3% in August from July. The three-month moving average rose by 0.3%, after the jump in the prior month. Year-over-year, the three-month average jumped by 4.3%. The PCE price index for durable goods has been dipping on a month-to-month basis and year-over-year, from the huge spike in 2022. So adjusted for inflation, falling prices boost “real” spending.
The pandemic spike of spending on durable goods, adjusted for inflation, still hasn’t returned to trend, and in fact seems to run permanently higher compared to pre-pandemic trend, which is another indication that our Drunken Sailors like their stuff and don’t just quit buying it because economists said they would.
“Real” spending on nondurable goods (adjusted for inflation) dipped by 0.1% for the month. The three-month average rose by 0.2%. Year-over-year, it rose by 1.1%. Nondurable goods include food, fuel, clothes, shoes, and supplies.
And it’s in gasoline where inflation is now raging. Not adjusted for inflation, spending on nondurable goods spiked by 1.3% in August from July!
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