Inflation Rebounded in the First Quarter of 2024, Eroding Disposable Income;
Homeowners and Affluent Americans Are Propelling Consumer Demand This Year
Inflation rebounded in the first quarter of 2024 after cooling in the second half of 2023. Prices of gasoline and diesel rose as OPEC+ producers extended supply cuts, Ukraine’s military attacked Russian refineries, and U.S. production leveled off near a record high. Prices of some agricultural products, including chicken and beef, rose as well. More concerning for the Fed, January and February saw notable increases in prices of non-energy services that change less frequently, like hospital services and car insurance. The inflationary momentum that built up over the last few years is taking a while to peter out. As a result, the U.S. economy’s key price indexes, including the CPI and PCE, moved sideways in early 2024 at levels above those consistent with the Fed’s inflation target.
Americans also saw their effective tax rates rise after the turn of the year as 2023’s increase in stock and home values translated into higher capital gains and property tax bills. The combination of hot monthly price increases and higher taxes slowed the growth of real disposable personal income—that is, incomes adjusted for taxes and the cost of living. The picture for household finances is mixed. The average household is doing quite well. Longtime homeowners who locked in mortgage payments years ago are insulated from recent years’ increases in shelter costs. Households with substantial wealth are benefitting from 2023’s double-digit increase in stock market values. Household net worth jumped 8.4% on the year in the fourth quarter of 2023. Homeowners and the affluent collectively account for well over half of consumer spending and are the dominant force behind its growth in early 2024.
Low and moderate income households, as well as middle-income renters, face substantial budget pressures from the high cost of living. These groups will likely see their standards of living hold roughly unchanged in 2024. But even so, they are in much better shape than during the early years of the recovery after the 2008-2009 recession. Today, most people who actively look for a job can find one. And many moderate income Americans secured big wage gains over the last few years as they switched into higher-paying industries and occupations, and as wage growth in the lower third of the income distribution outpaced the average. Additionally, some low-and-moderate income Americans are moving in with family or taking on roommates to balance household budgets. This is contributing to cooler demand in the rental market.
The Fed has been on guard for inflation staying sticky and will see early 2024’s inflation reports as disappointing, but unsurprising. At the same time, they are watching out for signs of a cooler job market. The Fed’s next move will probably be an interest rate cut in mid-2024, most likely at the June monetary policy decision. The Fed will likely announce plans to slow the run-off of its balance sheet at one of their next few decisions, too.
