PCE Inflation Jumps Again in November, Consumer Spending Softer

*PCE inflation continued to rise rapidly in November and cut into real disposable personal income with consumption slowing, as spending on durable goods were additionally constrained by supply bottlenecks. Even though consumption moderated in November, strong gains in September and October point to a solid gain in Q4. The Omicron variant is now expected to temporarily dampen consumption of services, which rose strongly in November (0.9% and 0.5% in real terms), but the intermediate-term fundamentals underlying consumption remain healthy.

*The PCE price index rose 0.6% and 0.5% excluding food and energy, lifting their yr/yr increases to 5.7% and 4.7% (Chart 1). These are strikingly high, and inflation has spread across a wide array of goods and services. Prices of goods rose 0.9% in November, reflecting ongoing supply constraints and strong demand, lifting its yr/yr rise to 8.5%. Prices of services rose 0.4%, raising its yr/yr increase to 4.3%. As we have described in numerous reports, this rise in inflation and associated increase in inflationary expectations are having a significant influence on wages.

*Consumption rose 0.6%, but was flat in real terms. While consumption of services rose strongly--0.9% and 0.5% in real terms—consumption of goods rose 0.1%, declining 0.8% in real terms. Consumption of durable goods fell 0.6% and 1.0% in real terms (Chart 2), while consumption of nondurables rose 0.6% in nominal terms, but fell 0.6% in real terms. The decline in durable goods is consistent with the November retail sales report that showed weak auto sales and significant declines in sales of auto parts and declines in sales in electronics and appliance stores. Presumably this reflects supply constraints. The healthy increase in consumption of services suggests that the dampening impact of the Omicron variant was fairly limited in November. It is expected to have a larger negative impact on services in December.

Chart 1.

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Chart 2.

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Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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