Personal income and consumption data for March are important in terms of revealing the general course of inflation. The first-quarter GDP reading, released the day before the personal income and spending report, also included March household spending results. The quarterly growth trajectory affected by Omicron will point to an acceleration in services expenditure growth, which is expected to strengthen further towards the summer months. However, spending on goods, particularly in the more discretionary durable goods sector, will likely be constrained by rising inflation and the conversion of demand to services. Expenditure item was 1.1%, above the 0.6% expectation, while revenue growth was 0.5%, while core PCE was announced as 0.3%, in line with expectations. In March, the PCE inflation indicator stood at 6.6% on a headline basis and 5.2% on a core basis.
Looking forward, the rotation of goods and services will accelerate as the year progresses. As the pandemic subsided, demand for durable goods such as furniture and cars softened. Housing and automobiles continue to be among the most interest-sensitive sectors of the economy. Rising interest rates mean negative reflections on household goods spending. The good news for households is that labor income should be strong, then other components could rise moderately as well. High commodity prices in the details of retail sales also cause an increase in the general total. Energy prices, on the other hand, have registered the fastest momentum since Hurricane Katrina caused gasoline prices to rise in September 2005.
The employment cost index, the Fed's preferred measure of labor costs, appears to have made another strong progress in 1Q22, in line with growth in average hourly earnings. It is also critical in that it shows that wage growth is accelerating as the labor market is “too hot,” in Powell's words. Figures such as average hourly earnings had become unreliable given the large fluctuations in employment during the pandemic. As the employment market normalizes, wages are less affected by changes in the industry job mix. As the recovery matured, ECI's relationship to average hourly earnings tightened. There are facts supporting the tightening in wages and salaries, as the Fed will pay more attention to. Other indicators of labor market tightness, such as the Beige Book and ISM, point to broad-based perceptions that higher wages are needed to attract workers, and this trend is likely to continue over the next few months.
Few days are left for the Fed's May meeting to raise interest rates by 50 bps. The Fed now seems aware of how far behind the curve they are and appears determined to reach neutral. In terms of wages, the momentum continues to keep the Fed's inflation intervention issues on the agenda. As inflation rises, workers will demand more wages, and the cyclicality that we have always stated in the form of inflation increase - high wage demand - accelerating short-term demand - increasing personnel costs of companies - demand and cost inflation phenomena is fed. High wages create inflation, and inflation creates high wages. Expenditure details, on the other hand, show that although GDP growth was negative on a headline basis in 1Q22, the trend will turn positive again in the following quarters. Real incomes are absorbed by inflation, and current account deficit and savings are also affected on the axis of credit, demand and imports.
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