Core inflation in February hits 2.8%, hotter than expected; spending increases 0.4%

Key Concepts

• Income and Spending: Analysis of personal income and spending trends.
• PCE (Personal Consumption Expenditures): A measure of inflation, including headline and core figures.
• Real Spending: Spending adjusted for inflation.
• Month-over-Month (M/M) and Year-over-Year (Y/Y): Comparisons of data from one month to the previous month and one year to the previous year.
• Revisions: Updates to previously released economic data.
• Yields: The return on investment for bonds, specifically the 10-year Treasury yield.
• Basis Points: A unit of measure equal to 1/100th of 1%, used in finance.
• Steepening of the Curve: Refers to the difference between long-term and short-term interest rates increasing.

Income and Spending Data

• Income:
  • Expected to increase by 0.5% (or 0.4%).
  • Actual increase: 0.8%.
  • Previous month's increase: 0.9% (revised down to 0.7%).
  • This marks solid back-to-back increases.
• Spending:
  • Previous month: -0.2% (first negative number in two years, biggest drop in four years). Revised to -0.3%.
  • Current increase: 0.4% (about as expected).
• Real Spending (Adjusted for Inflation):
  • Previous month: -0.5% (first negative in a year, biggest drop in four years). Revised to -0.6%.
  • Current increase: 0.1%.

PCE (Personal Consumption Expenditures) Data

• Month-over-Month (M/M):
  • Expected: 0.3%.
  • Actual: 0.3%.
• Year-over-Year (Y/Y):
  • Expected: 2.5%.
  • Actual: 2.5%.
• Core PCE (M/M):
  • Expected: 0.3%.
  • Actual: 0.4% (warmest since January 2024).
• Core PCE (Y/Y):
  • Expected: 2.7%.
  • Actual: 2.8% (warmest since the end of last year, when it was 2.86%).
  • This indicates that core PCE remains "sticky," meaning it's not decreasing as quickly as desired.

Revisions Analysis

• Income revision: Previous month's increase revised from 0.9% to 0.7%.
• Spending revision: Previous month's decrease revised from -0.2% to -0.3%.
• Real spending revision: Previous month's decrease revised from -0.5% to -0.6%.
• Takeaway: Revisions were slightly more negative than positive.

Market Reaction and Yields

• Despite slightly hotter PCE numbers, yields are moving down.
• The 10-year Treasury yield had a one-month high close yesterday (February 24th).
• Current 10-year Treasury yield: 4.31%.
• Down 5 basis points on the day, but up 6 basis points on the week.
• The "steepening of the curve" is noted as something to pay attention to.

Conclusion

The report presents a mixed picture. While income and spending rebounded from negative figures in the previous month, inflation, as measured by core PCE, remains stubbornly high. Revisions to previous data were slightly more negative than positive. Despite the hotter inflation data, yields are moving down, and the steepening of the curve is a key factor to watch. Overall, the speaker considers it a "pretty good report."