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First Cut: Personal income, spending above expectations in April, PCE deflator firms a bit

Personal income was up 0.5% in April from March, above expectations as wages and salaries maintained a tempered pace of increases at up 0.3% from the prior month. Personal consumption expenditures faded to up 0.3% as spending on durables fell 0.8% in April from March, while nondurables rose 0.7% and services were up 0.3%, if at a slower pace than the prior month.

The savings rate was essentially unchanged at 6.2 in April from 6.1 in March.

Steady and consistent increases in wages and salaries will continue to keep consumer confidence higher and in turn should support future spending. The recent revival of activity in the housing market could well spark demand for hard goods like home furnishings even if motor vehicle purchases continue to lag. Nondurables spending may slow further along with moderation in consumer energy costs, although higher prices for foods may balance some of that. Spending on services could also improve with a stronger housing market as well as consumers finding discretionary spending more affordable with higher incomes.

The PCE deflator was up 1.5% year-over-year in April, a tenth higher than the up 1.4% in March and above the 1.3% in January and February. The core PCE deflator was also up a tenth to 1.6% and in line with the readings of 1.5% in March and 1.6% in February.

FOMC policymakers are going carefully watch the behavior of all the major inflation indicators. While the PCE deflator is the Fed’s preferred measure, it seems to be under the influence of some ideosyncratic factors in recent months. If this is the case, the impact should lessen over time — as seems to be happening. The FOMC consensus is not going to act impulsively to respond to signs of renewed low inflation, especially since the labor market is experiencing a sustained undershoot for longer-run unemployment rate forecasts. That does not mean that lower inflation readings will not be carefully assessed, nor that policymakers are not concerned about the credibility of the 2% inflation objective.

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