By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street
People want to get on with their lives, it seems. Their mood has improved. They’ve gotten used to living with high inflation. They got raises or got higher-paying jobs. Gasoline prices have plunged since the peak in mid-2022, and that matters a lot because it’s the most in-your-face inflation along with food inflation. They might still gripe about higher prices, but you live only once?
And so they spent money left and right in January, and they outspent even this raging inflation. We already saw surprising strength from new and used vehicle sales coming out of the auto industry, and from the retailers’ point of view earlier this month, which showed that consumers were in no mood for a landing.
Today, we got inflation-adjusted (or “real”) consumer spending trends for January from the Bureau of Economic Analysis. Personal Consumption Expenditures (PCE) on durable goods, nondurable goods, and services is adjusted for inflation based on the PCE price index, which blew out.
Spending on services, adjusted for the raging inflation in services, jumped by 0.6% in January from December, seasonally adjusted, and by 4.1% year-over-year (not seasonally adjusted).
Not adjusted for inflation, spending on services spiked by 1.3% from the prior month, and by 10% year-over-year!
Services accounted for 62% of total consumer spending. It includes housing, utilities, insurance of all kinds, healthcare, travel bookings, streaming, software, subscriptions, entertainment, repairs, cleaning services, haircuts, etc.
Certain types of discretionary services – airplane travel, cruises, live entertainment, etc. – got crushed during the pandemic. Revenge spending on some of those services set in some time ago.
Despite the strong growth over the past 12 months, and despite the huge recovery from the knock-out in 2020, spending on services, adjusted for inflation, still hasn’t reverted to pre-pandemic trend:
Spending on durable goods, adjusted for inflation, spiked by 5.2% in January, seasonally adjusted. But year-over-year, it was up only 0.5%. The year-over-year figure is key here, and it’s not seasonally adjusted.
I discussed earlier the strength of new and used vehicle sales in January, based on units delivered to end users, that caused used-vehicle wholesale prices to jump again in January and in the first half of February, as dealers bid up prices at the auction to restock their inventories.
After the massively over-stimulated spike during the pandemic, “real” spending on durable goods was supposed revert quickly to the mean, to the pre-pandemic trend, and it did some of that, but nearly two years after the spike, it’s still well above the pre-pandemic trend.
Seasonal adjustments for durable goods in November, December, and January are always huge, as they attempt to iron out the massive spike in spending on durable goods during the holiday season and the plunge in spending in January. These seasonal adjustments are linked. If they’re too aggressive for November and December (pushing seasonally adjusted spending down too far), they’re also too aggressive in January (pushing seasonally adjusted spending up too far), which is what we may be seeing in the above chart.
If you look at the above chart while holding your tongue just right, you can see that spending, adjusted for inflation, roughly flattened out over the past 12 months at very high levels.
This is confirmed by year-over-year spending, adjusted for inflation, but not seasonally adjusted, which ticked up just 0.5% from the very high levels a year ago.
Spending on nondurable goods, adjusted for inflation, rose by 0.5% in January from December, seasonally adjusted, but declined 1.4% from a year ago.
Nondurable goods are dominated by food, energy, and household supplies. We’ve already seen that gasoline consumption, measured in barrels per day, dropped in 2022 in reaction to spiking gas prices. So on an inflation-adjusted basis, consumer spending on gasoline dropped.
Spending on nondurable goods has now nearly reverted to pre-pandemic trend.
The people don’t want this thing to land.
Overall “real” spending growth jumped by 1.1% in January from December, inflation-adjusted and seasonally adjusted.
Year-over-year, not seasonally adjusted, “real” spending grew by 2.4%. In the 10 years before the pandemic, annual growth of “real” spending ranged from +1.4% at the low end (2012) to +3.3% at the high end (2015), and averaged 2.2% over those 10 years.
So the year-over-year growth in January of 2.4%, adjusted for inflation, was just above the 10-year average of 2.2% before the pandemic. This is not the sign of any kind of landing. Clearly, people don’t want this thing to land.
Note the quirks of the seasonal adjustments in the Novembers and Decembers of 2021 and 2022, when seasonal adjustments may have pushed down spending figures too far, and then conversely pushed up spending figures too far in the Januaries of 2022 and 2023. These quirks are largely related to durable goods, as we saw above.
The month-to-month seasonal adjustments, which are based on the history of seasonal swings, have been a little rough since March 2020, when radically different consumer spending patterns distorted everything and threw all historic patterns out the window.
But year-over-year spending growth (+2.4%) is not seasonally adjusted.
And the chart shows the trend – the continued strength of spending growth despite the quirks in Novembers and Decembers (when the media proclaimed the demise of the consumers), and Januaries (when the media proclaimed the resurrection of the consumers), when in fact, these consumers were plodding along just fine, energetically outspending inflation:
“The people don’t want this thing to land.”
What else do you do in America!!! Shop shop shop, till you drop.
People have gotten used to borrowing and consuming. Gov has been borrowing for ever, Corps are borrowing. As long as there is free DOLLAR to print, why not!!!!!
Welcome to our roaring 20s…. v 2.0
The tragedy at East Palestine Ohio gives some perspective, as you hear from many unfortunate people out there, “We are living pay check to pay check, what do we do now!”.
It’s been said that you can’t take it with you.
That’s undeniably true. Nobody has ever seen a hearse pulling a U-Haul.
Unless they were a rock band…
…so what’s with the spike in storage unit costs, then.
How much of the increase is people using gift cards/ certificates?
And there is a difference between increasingly fewer people spending increasingly more for the same and actually more goods and services being bought by more people.
Analysis of services seems a bit foggy when it includes “housing, utilities, insurance of all kinds, [and] healthcare”. Would like to see a more detailed breakdown of services spending. I know some of the prices have risen with inflation but some have also risen in accord with people’s desperation and the robber-barons capitalization of it.
The services you noted: “housing, utilities, insurance of all kinds, [and] healthcare” are not optional expenditures — and repairs and haircuts are at best only kinda sorta discretionary. What about banking services like interest and penalty payments on credit cards? Are they included somewhere in this accounting of services?
“Nondurable goods … dominated by food, energy, and household supplies” rose slightly for the last couple of months but declined from a year ago. I do not know what other people were up to, I turned down the heat, drive less, and stocked up on food and household supplies taking advantage of larger volume purchases from sources further from my home — hence sources I avoid visiting too often as part of cutting down on my driving.
I have made some small purchases of durable goods in an effort to do more pickling and fermentation to preserve foods when the spring crops start coming in. With inflation the way it is I am tempted to buy more goods before my money is worth event less than it is worth now. But most of the items I buy are targeted toward achieving greater self-sufficiency. I do not know what kind of spending and motivation drives other consumers.
Looks to me like the cost of living is being inflated. Suggesting that consumers are getting used to higher prices and “they don’t want this thing to land” is not a conclusion I can reach, even given all the pretty charts and “inflation adjusted” and “season adjusted” numbers.
Yes it seems like a very shallow analysis of the economic situation and as Mildred noted below, seems like the inflation rate is being underestimated, as is the fact that prices are growing astronomically even outside of inflation. I’d like to know – are people *actually* buying more stuff or are they paying more for the same stuff?
For sure the essential “services” need separated out, rent/utilities/healthcare are not services in the same way that nail salons and housecleaning are.
Honestly seems like more “everything is fine” while the world (literally) burns.
Like you, we are preparing for summer vegetable growing. I’m planting open pollinating varieties only. We have a perennial kale and also collard plant. A dehydrator has been a good investment for us; dried fruits and tomatoes take up a lot less space than canned. Kim chi is easy, and you don’t have to add all the peppers and garlic. (I miss Jerri-Lynn)
What about banking services like interest and penalty payments on credit cards? Are they included somewhere in this accounting of services?
If memory serves, Michael Hudson researched this and discovered that the answer is YES. Your bank charging you late fees is a service that is added to the GDP.
Banking services are counted in GDP along with things like homeowners imputed rent, but I do not know if economists mix banking services in when cooking up magic numbers for measures of inflation.
The “service” spending I am seeing among family members and family friends is a desperate spending on home help because their health has become so bad that they cannot do without that help, even if they can barely afford it.
I just flew from CA to CT and back, and every flight was only about 4/5ths full. For years and years now I have only experienced jammed flights. I am not sure that people are now flying as much for pleasure.
My electric bill went up 30 percent this month due to increased rates, and I have no reason to think that here in CA and with pg&e that it is going to go down again.
This was a strangely optimistic article.
Maybe the reality-based covid realists are staying off of commercial airplanes.
I think what remains of the American “middle and working classes” may have caught on that the human species is not long for this world. With Covid, bird flu, world war III and climate change as constant threats, average life spans plunging and the birth rate among these folks already way down. Why not just spend it all? At least one’s kids might want a late-model car when we check out. They sure don’t want the family china and antiques some of us have lovingly preserved in honor of past generations.
(To be honest, some of us saved all that stuff because we really liked living with it, and saw no point in buying new when antiques were so much better made and more beautiful. But you can’t give them away now. And the next generation has less than no interest.)
I think many years ago the Times had a story about kids not wanting so much of this stuff. And with affordable living spaces continuing to shrink, and increasing economic uncertainty, it kind of makes sense. Where would you put these things you’ve inherited? Myself, I’ve always hated stuff. More things to move. Somehow I’ve still accumulated too much stuff. Although I guess pre-pandemic clothing doesn’t really count; who knew I’d never need more than one outfit again in my life?
You’re right of course. And it’s a very sad thing to be imprisoned by one’s (and one’s ancestors’) possessions. Yet… I have a photo of my great grandmother at age 13, in 1863, in the original frame with both photo and frame still in beautiful condition. It’s been treasured and taken care of for 150 years, so it pains me that with no one wanting it when I’m gone, it will wind up in some landfill. I know, a trivial thing in the scheme of things, but still…
Carla, have you considered at least scanning the photo and posting it on a genealogy website? At least that way someone searching would see her picture. (I realize that doesn’t preserve the physical artifact or the frame, but at least your great grandmother’s image will live on…as long as the ancestry.com servers continue to run…)
Yes. And also contact the county historical society, usually connected with the county library.
Well, with gas and food, you have to spend what is necessary to survive. I am fortunate to spend very little on gas because I’m retired and don’t have a commute, but there is a minimal amout of driving that must be done. We are driving to Monterey for a small vacation, but sanity requires escaping from Fresno occasionally. Food has gone up outrageously, but it was basic to begin with, canned vegetarian chili, chicken, fruits and veggies – and the fruits and veggies have increased astronomically. I have completely eliminated what processed food (frozen pizza) I used to rarely eat – its not good for me health wise, and now its unaffordable, but that really is a contrived silver lining. I really wonder how people below the median income with children make it.
“I really wonder how people below the median income with children make it.”
We no longer have small children, but, I can attest from the now almost constant sound of wailing and crying toddlers I am encountering in the Bigg Boxx stores that the “deplorables” have reverted to the historical mean and now consider said small children as economic resources. Either as tiny field hands or as “items of consumption” for the medical ‘parts’ industry. We haven’t gone the ‘Irish Cuisine’ route, yet.
>”…the fruits and veggies have increased astronomically.”
Same here in Canada. I think the official inflation figure for those things is horribly understated. One horrid example: Cooking onions (bought a few at a time, not some ridiculously large bag) not too long ago were $1 a pound everywhere. Now they’re regularly $2 a pound or more and one somewhat pricey store nearby is asking $3 a pound. For a couple of plain old cooking onions!
If you cut off the root end of any onion and plant it, it will regrow. Also, plant potatoes that are sprouting.
Inflation just isn’t as harmful for the economy as unemployment, no matter how much the hard-money oriented neo-liberal economists wish it was. Yves has made this point a number of times.
Besides, there’s more bargaining power at the low end of the labor market than at the middle and upper tiers.
The 1970s were fine for ordinary people, but horrid for finance types that couldn’t stand watching asset prices devalued in real terms. 2022 offered no place to hide for asset allocation…stocks, bonds, commodities all got knocked down. While, real wages, especially at the lower end, held up pretty well.
That may help explain why mr. Market is having a sad, despite a tight labor market and continuing consumer spending.
Yes, the ones really feeling the pain are lenders like the big banks, and they have an outsized influence on the media coverage and a stable of captured economists they can trot out for ‘opinions.’ So we get shibboleths like the wage-price spiral, intended to influence policymakers and central bankers to engineer a recession, push unemployment up, and give businesses more of a whip hand.
Yes, the received wisdom about how horrible the 70s were economically for ordinary people is just completely off-base. Also, the weird notion that you should hold onto your money when inflation is high makes no sense… it’s only going to be worth less in the future so if you need something better get it now. Also the notion that higher interest rates are supposed to reduce housing inflation… say what?
But what is true for ordinary people is not true for bankers like Powell, whose portfolio I’m sure “underperformed” in the 70s.
Spending during inflation I certainly understand but with the exception of housing — if you need a house you are S.O.L. around these parts. Prices are insane, having doubled in 5 years (or less).
Thank you for the reasonable comment here. Many of the rest of the comments in this thread are straight doomerism and the fact of the matter is that if you want a job right now you can have one. That is awesome.
I’d sure as hell rather have inflation than Great Recession level unemployment.
The problem is that we now have both. I look at the employment participation rate as well as the various versions of the “employment rate.”
The other problematical part of the employment conundrum is that a large chunk of today’s jobs on offer are low wage service ones. The old line manufacturing jobs that enabled America to have a fairly inclusive economy fifty years ago have been ‘offshored’ and ‘outsourced.’
America no longer has a pro social labour policy.
Refusing to take a job that often pays less than the cost of working that job is simply rational decision making. America has always shamed people who refused to ‘comply’ with the “work ethic,” even when that ethic harmed their lives. Orthodox economists and politicos cannot have it both ways; people cannot be expected to be rational actors and self sacrificing “good consumers” if the sacrifices are not rewarded.
Please tell me how I am going to stop spending on goods and services?
I had to get my car repaired. It was definitely more expensive than the last time I had the same repair done. What should I have done, bought the equipment needed to do the repair myself? Or eat the increase?
Food is getting more expensive by the day, should we be eating less in my family? I stopped buying eggs, bacon until recently, and any beef until I see a good sale. Should I convince my family that lentils and rice is the way to go?
What about sneakers for my kids? Or stop paying my property taxes that went up?
See, Wolf’s contention that we have “gotten used to it” is wrong. We have no choice.
“We have no choice.” Agree completely. And as Jeremy Grimm noted above, some of us are buying what we can now in bulk, even if we don’t need it, because the day will come when we do, and the way prices are rising we might not be able to “afford” it then. Not that things are genuinely affordable now. Only people who are very comfortable in their lives would look at the prices everywhere and number of people being laid off and think the masses have “gotten used to it.” What choice to do we have? It’s pay for things or starve.
There is another ‘choice’ available, though it is not spoken of in polite company, Crime. I believe that Victor Hugo wrote a famous book based on that “intolerable situation.”
It’s high time for a modern retelling of Hugo’s story. Call it, “The Deplorables.”
Agree.We are not yet retired but looking towards it soon. We have turned down the heat, lights, water heater but our electric bill is higher than ever.
We cut Sunday drives out and combine shopping but our gasoline bill is higher than 2 yrs ago,
our food spending is crazy high even though we have cut back any treats and expensive goodies and have always been scratch cooks.
Our older car needed a repair – the price has gone up dramatically from when we had similar done to our other car last year.
Tires are up at least 30% from two yrs ago as well
We tried to book a vacay rental in “family friendly” Ocean City, NJ to give our adult daughter/son in law/3 yr old grandson and us ( whom I provide full time daycare for) their first actual vacation since marrying in 2013 – the cheapest we found was 14 THOUSAND DOLLARS for a 2 week 3 bed rental( 3 blocks back from the beach). We clearly did not rent it
We are spending astronomically more for less’ good’ good and for services NOT going on a wild spending spree
Wolf is a lunatic living in his own bubble it seems
This makes sense. The draconian solution to the boomer inflation in the 70s, 13% interest by the Fed, probably didn’t cause much change until the 80s when mental institutions, most of them unconscionable hell holes, just turfed out all the feeble and crazy inmates and created intractable homelessness which we just ignore to this day. The expense of survival simply filters down until it lands on the hapless. If capitalism is primarily a population ponzi – perpetual growth without much value – then we might be stuck. Right now there are enough young families to do the spending. Let’s all hope we can find an equilibrium for everyone. But heaven forbid we should ever utter the word “overpopulation”.
I’ll put forth the observation that the old radical Chinese Communists tried to deal with their population issue with the “One Child Family” program. As bad as that is made out to have been, today’s apparent implementation of the “Great Leap Backwards” to living standards, especially medical ones, of the nineteenth century is harsher and more, for want of a better phrase, ‘Techno-Elitist.’
As to why the mental institutions “turfed out” their helpless and vulnerable inmates; I have read that this was pushed by Reagan and his Kitchen Cabinet. In many cases, the concept of Evil is inadequate to the task.
There are numbers out there suggesting people are using debt to finance this spending. If so eventually it will have to come to an end.
See Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks – via FRED (Fred!) – if I eyeball that trend line correctly, looks like we’re right pretty much back to pre-pandemic extrapolation.
Supermarket check out line proclamation:
“I’m happy to pay these higher food prices TO HELP UKRAINE-aren’t you?”
Actually had a few idiots nod their head in approval.
#BetteMidlerSyndrome (via Twitter)
And what happens to people who are on food assistance programs when the additional $$ they were getting under the Covid emergency expires AND they have to requalify for all the various assistance programs including MediCaid AND the extras they may or may not have been getting from local food pantries (some also getting their extra funds, etc. from the Covid emergency) go bye bye and price gouging remains?
Well, people just go hungry. It also weakens peoples’ defenses to infectious diseases like Covid. That was one of the reasons famines or sieges become so lethal. It often wasn’t starvation that directly killed. Even if there was enough food to stay alive, it didn’t mean that people were healthy enough to resist diseases. Comes an infectious disease like smallpox, measles, or the flu…
However, it is really only the poors and the disposables that are going to suffer anyways and not the Professional Managerial Class, so why worry? (I do think that is how too many people think.) of course, unhealthy people are great disease factories spreading all those diseases that they are suffering from.
Thank you! Been waiting for this! This is also why Jay Powell is gonna keep his foot on the accelerator – because people keep buying! And as noted above by other, in many cases people have no choice.
Here, I see less inflation than just plain old price gouging. When something doubles or more in price, I don’t call it inflation.
Also, as Carla pointed out, all of our inherited antiques are worthless. None of the next generation wants them and no one else does either. We raised our kids living with all of this stuff. They have no interest.
> Here, I see less inflation than just plain old price gouging
See former Vice Fed Chair Lael Brainard’s remarks at the University of Chicago Booth School of Business, Chicago, Illinois (from January this year, via federalreserve.gov).
“Retail markups in a number of sectors have seen material increases in what could be described as a price–price spiral, whereby final prices have risen by more than the increases in input prices.11 The compression of these markups as supply constraints ease, inventories rise, and demand cools could contribute to disinflationary pressures.”
Brainard tiptoes around the tulips as it were … but she knows the deal. There has been price gouging, but her bet is that prices will go down as supply chains get back to normal. Sadly, that doesn’t appear to be happening, does it? Since people keep buying at inflated prices, sellers have little reason to relent.
The idea that people keep buying at inflated prices, hence sellers have little reason to relent — an idea this post suggests — is a strange twist on the old economic argument that sellers demanding inflated prices will face competition from sellers offering that good at a lower competing price. I guess this is an example of the new economic thinking necessary to rationalize the twisted new economic realities.
> the old economic argument that sellers demanding inflated prices will face competition from sellers offering that good at a lower competing price
Easily upended by a tacit collusion paradigm. If the demand is actually there, why would I sell for less if people are demonstrably willing to pay a higher price? Remember, we’re talking about capitalists here.
Please read my comment again. I do not need the ‘tacit’ collusion paradigm because I am sure that both tacit and plain old face-to-face, document exchange, old-boys club, and cross-linked Corporate Boards goes on and has gone on for years. The expression “new economic reality” comes from the name INET. I was throwing a barb at INET after becoming irritated by the Jim Chanos interview.
The thrust of my comment is that there is little or no Market at play in driving up prices and economic theory based some idea of a Market is way past sell-by-date.
> The expression “new economic reality” comes from the name INET. I was throwing a barb at INET after becoming irritated by the Jim Chanos interview.
:) … ahh, which I did not read (yet)
> The thrust of my comment is that there is little or no Market at play in driving up prices and economic theory based some idea of a Market is way past sell-by-date.
I was almost going to post another comment about microeconomic assumptions being all pish anyway … but I’m glad I didn’t double #PreachToTheChoir … :)