Uncle Sam Bribes His Way Into Goldilocks’ Not-yet Thirsty Bears

According to the Federal Reserve’s preferred inflation measure, the PCE Deflator, consumer price pressures remained muted in January 2021. No surprise, given the absence of inflationary conditions contained within the prior released CPI report for the same month, as even the contribution from surging oil prices was noticeably minimal in both.

The Bureau of Economic Analysis (BEA) today said that broad consumer prices as derived from PCE data increased 1.45% year-over-year last month, accelerating modestly from December’s 1.26% (and 1.15% during November). The so-called core rate, removing food and energy prices, gained 1.53% in January 2021 when compared to January 2020. That one was up just 8 bps from 1.45% in December.

Forget about any flood.

These figures are taken from the first full month when the second of the government’s helicopter payments ($600) had been made. Those transfers clearly show up in the BEA’s Personal Income and Spending data, also released today, having pushed monthly income up by a full 10%!

Low inflation, however, is instead being extracted from the fact consumers still prefer not to spend this windfall. Income from private sources, excluding transfer payments, declined for the third straight month in January (which in the past has been used by the NBER as an important indication of recession; then again, the US and global economy hasn’t yet escaped from the last one).

Real Personal Income Excluding Transfer Receipts was revised substantially lower for the last six months before adding to the downward trend which began in November – consistent with rising jobless claims and stumbling then falling payrolls.

Regardless of so much fiscal and monetary “stimulus”, these hadn’t contributed much to the private income where private income was still 2% less in January than the same month last year.

As one consequence, nominal spending (PCE, or Personal Consumption Expenditures, includes both services and goods) was lower year on year, too. While outlays did rise month-over-month – like retail sales, or gasoline demand, a clear effect from Uncle Sam’s wallet – it was miniscule when compared to the scale of the stipends. Americans spent a little relative to how much in excess they continue to save.

In real terms, PCE increased by 2% in January from December (far less than the 10% gained income) but that was still nearly 2% less than January 2020. The Personal Savings Rate jumped back above 20%.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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