Data released on Friday showed real spending increased by 0.3% in September and August numbers were revised higher from 0.1% to 0.3%; the core PCE climbed to 5.1%. Analysts at Wells Fargo, point out that for the eighth time in nine months, consumers spent more money than they earned after adjusting for inflation in September. They argue that this spending is driven by an unsustainable draw-down of savings and over-reliance on credit, and they suspect it will not end well unless real disposable income picks up.

Key Quotes: 

“The core PCE deflator, the teacher’s pet of inflation gauges for Fed policymakers, came in at 5.1% in September, up from 4.9% previously and echoing a similar rise in core CPI inflation. The key distinction is that today’s data do not mark a new cycle high for core PCE inflation. That milestone was reached in February when it hit 5.4%. Still, the quickening pace of core inflation more or less makes another 75 bps hike all but assured at the FOMC meeting this coming Wednesday, Nov. 2. That could mark the last 75 bps hike of this cycle if inflation slows markedly as we expect it to, which would allow for a more gradual pace of tightening.”

“The one caveat is if real disposable personal income growth continues to recover, households will receive a more sustainable source of purchasing power. Our baseline expectation is that while inflation is rolling over, it will be a long and bumpy way down, which will again exert some downward pressure on real disposable income growth in coming months. Furthermore, with most measures of labor demand beginning to top out, wage growth should soon moderate, and with this representing the largest source of income for most households, lower wage gains will bite into nominal personal income growth. Households thus will likely continue to save less of their monthly income to consume.”