August Personal Income & Outlays data, released this morning, show an economy that continues to grow despite the impact of the Delta variant. According to the Bureau of Economic Analysis (BEA), American incomes and spending continued to expand in August, and inflation held relatively steady. As the severity of the current wave of COVID-19 ebbs, we expect consumer spending to continue to grow, especially on in-person services. The tight labor market should also benefit personal income in the months ahead, although the expiration of some federal unemployment benefits in early September may result in a temporary dip. While year-over-year (y/y) inflation rose to a 30 year high in August the month-over-month readings held steady. We anticipate continued moderation in many of the pressures driving prices higher in the coming months.

Overall personal income rose 0.2 percent (in nominal terms) month-over-month (m/m) in August, driven by gains in wages and rental income. While employment growth moderated for the month, wage growth continued to expand. Looking ahead, personal income may temporarily dip due to the recent expiration in the Federal government’s enhanced unemployment benefits, but should rebound on the back of stronger wage growth and improved employment readings toward the end of the year.

Personal consumption expenditures rose 0.8 percent m/m in August following a 0.1 percent m/m decrease in July.  Spending on services rose by just 0.6 percent m/m while spending on goods rose by 1.2 percent m/m. The slowdown in service spending corresponds with August retail sales data and is associated with elevated consumer hesitancy about consuming in-person services due to the Delta variant. Meanwhile, spending on durable goods fell by 0.4 percent m/m (driven by weak motor vehicle sales) while spending on non-durable goods rose by 2.1 percent m/m. The overall strength seen in spending on goods mirrors the pattern seen last year, when previous waves of COVID-19 channeled consumer spending toward things that they could consume at home. Looking forward, we expect spending on in-person services to strengthen as the threat of Delta wanes.

Headline PCE price inflation came in at a 30 year high of 4.3 percent year-over-year (y/y), vs. 4.2 percent y/y in July.  The BEA also reported that Core PCE Inflation, excluding food and energy prices, was stable from the previous month at 3.6 percent y/y. Critically, the month-over-month growth rates for these key inflation metrics both held steady. Headline PCE inflation was 0.4 percent m/m in August, vs. 0.4 percent m/m in July and Core PCE inflation was 0.3 percent m/m in August, vs. 0.3 percent m/m in July. Durable goods prices continued to be the driving force behind much of the inflation seen in these data. As supply chain bottlenecks gradually abate prices for certain goods should ebb. However, some price increases associated with things like higher wages and semiconductor shortages may be more persistent.