Demand for services jumped 1.1% in April as mass vaccinations accelerated, almost surely foreshadowing the coming surge in service spending that will be one of the defining narratives of the economy through the rest of the year.
The composition of spending showed that demand for services increased 1.1%, durables rose 0.5% and nondurables dropped 1.3%, according to government data released Friday. Underscoring that forecast is a personal spending rate that increased by 0.5% on the month, putting it up 18.5% on a three-month average annualized pace, and a personal savings rate of 14.9%. All of those gains bode well for the economic reopening that is gathering pace.
The clear challenge as the economy reopens is the availability of services as demand temporarily outstrips supply.
The clear challenge to that reopening is the availability of those services and the prices charged as demand temporarily outstrips supply. On the month, the personal consumption expenditure deflator, which is closely watched by the Federal Reserve, increased 0.6% and is up 3.6% on a year-ago basis. The policy-sensitive PCE deflator excluding food and energy advanced 0.7% and is up 3.1% on a year-over-year basis. On the month, food increased 0.3%, while energy goods and service costs declined 0.2%.
While the increase in prices will not alter the path of monetary policy out of the Federal Reserve, central bank officials will have to step up their communications efforts around their flexible average inflation targeting regime to explain why the move above 3% in the core policy variable will not alter inflation expectations.
Given that public inflation expectations are strongly linked to rising gasoline prices — the retail rack price of gasoline is up 17.7% since Jan. 1, 2020 — the central bank has its work cut out for it as it prepares to engage in one of the more significant periods of open mouth operations – or public persuasion on rates — in its recent history.
On the income side, personal income declined by 13.1% and disposable income dropped by 15.1%, both of which were expected following the 20.9% increase in March that was fueled by government transfers to consumers.
Still, personal income excluding government transfers advanced 0.5% — the third straight monthly gain in the series, which is a function of the strong pace in monthly hiring as people stream back into the workforce.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.