In this Marketplace piece (with Justin Ho), one of the main points is the disjuncture between the evolution of consumption and inflation rate for services vs. all else. Here’re some pictures.

Figure 1: Total personal consumption expenditures (blue), core (tan), services (green), durables (red), and nondurables (chartreuse), all in Ch.2012$, logs 2021M11=0. Source: BEA via FRED, and author’s calculations.

Durable consumption expenditures are dropping fast, as is expected given interest rate increases — although they remain above the pre-pandemic trend. Nondurables expenditures have been falling from the 2021M11 peak and are about at pre-pandemic trend.

Interestingly, services are continuing to rise through December, at 0.5% m/m (not annualized). Taking the permanent income hypothesis at face value, this suggests households are assuming income over the next few years are still likely to rise. Now, consumption behavior is better modeled using some rule-of-thumb consumers (i.e., households that consume all of disposable income), with the share ranging between 0.2-0.5. Real disposable income rose 0.2% in December, so I’d say that consumption is staying strong partly because perceived income prospects over the next few years have not collapsed.

What about inflation?

Figure 2: Quarter-on-quarter inflation rate for personal consumption expenditure deflator (blue), core deflator (tan), services deflator (green), durables deflator (red), and nondurables deflator (chartreuse). Red dashed line at 2%. Source: BEA via FRED, and author’s calculations.

One of the big stories of 2022 is the reversal in inflation rates in favor of services. This remains true, but it’s also important to note that services inflation is now falling as well, at 4.9% q/q annualized.

This is leading to overall PCE inflation (q/q) declining to near the 2% target.

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