Not surprisingly, we got more data showing that
inflation spiked up in the month after the bombs started falling in the Middle East. Consumers faced escalating prices in March as the Iran war sent oil soaring and created a new level of challenges for the Federal Reserve, according to a batch of reports Thursday that showed economic growth slower than expected and a generational low in layoffs.
The core personal consumption expenditures price index, which excludes food and energy, accelerated a seasonally adjusted 0.3% for the month, pushing the 12-month inflation rate to 3.2%, the Commerce Department reported Thursday. The readings matched the Dow Jones consensus estimates. Core inflation hit its highest level since November 2023.
Including the volatile gas and groceries components saw higher readings, with the monthly gain at 0.7% and the annual rate hitting 3.5%, also in line with forecasts.
We can blow off the gas price increase if we want, but I bet typical American consumers aren’t, and businesses won’t be ignoring the extra transportation and input costs that results. So let’s also not shrug off a PCE monthly inflation number that would be over 8% on an annual basis.
The only time we’ve seen the PCE Price Index increase by this much in a month was during the peak post-COVID inflation times between October 2021 and June 2022, when it reached 0.7% two times and exceeded it two other times. And while gas prices leveled off in the first part of April, we've now seen another jump in prices in the last week, with an increase of 35 cents a gallon in the last 7 days, and 44 cents in Wisconsin.
Digging into
the full income and spending report itself, it shows that while Americans spent more in March, a lot of it was due to the rising gas prices in that month.
Personal outlays—the sum of PCE, personal interest payments, and personal current transfer payments—increased $198.6 billion in March. Personal saving was $857.3 billion in March, and the personal saving rate—personal saving as a percentage of DPI—was 3.6 percent….
The $195.4 billion increase in current-dollar PCE in March reflected increases of $132.6 billion in spending on goods and $62.9 billion in spending on services.
Take out increased gas and health care spending, and the rest of PCE went up by 0.5% instead of the 0.9% top line (not adjusted for inflation). Not bad, but not amazing either.
And for most Americans, incomes didn’t even go up that much, because most of the jump in income came from non-working income.
That rise in non-working income reflects farm owners seeing their incomes nearly double in March, as
a large swath of Farm Bridge Assistance payments went out that month, trying to make up for damage caused by Trump tariff policy. Take that out of the equation, and it’s only a 0.3% increase in incomes for March - well below inflation. In addition, disposable incomes have been inflated due to increased tax refunds in the first months of 2026. That’s not going to be the case after April, so that’ll be another headwind.
The savings rate also continued to fall in March, as the 0.6% increase in personal incomes didn’t match the increase in spending. This continues a general decline that we've been in since the start of 2024.
With costs staying high for the foreseeable future, don’t be surprised if the savings rate falls below 3% soon, which also would be a flashback to 2022’s peak inflation…. without the stimmy checks and higher incomes of 2020 and 2021 bulking up savings before that. The other time we fell below 3% saving? The mid-2000s, right before the debt-pumped Bubbles popped and the Great Recession began.
Put all this together, and add in the fact that unemployment claims are somehow going lower at the end of April, and I’d argue that we are in a “’flation” stage of the stagflationary cycle that is reality in much of America. While
the Federal Reserve stayed pat this week and didn’t even change their wording about risks or plans for future rate cuts (albeit with some dissenters on the Board). I have to think that more declines in savings and continued inflation for Q2 2026 will lead to changes at the next Fed meeting in mid-June.
And while American consumers and Wall Streeters continue to shake off the higher prices and stagnant incomes, there has to be a point where they deal with reality and make some adjustments of their own. Which is going to trigger a lot of other economic effects.
