PCE Feb 2025: Inflation, Income, Outlays

A slightly warmer PCE inflation report also saw a pickup in outlays from the anomalous decline in January.

Mar 28, 2025

One more tap to go next week on Liberation Day. Need to be sure free trade dies.

PCE price index was flat YoY at +2.5% but Core PCE ticked higher to +2.8% from +2.7% on the larger Services mix moving to +3.5% from +3.4%. That more than offset goods ticking lower to +0.4% from +0.6%. The PCE number does not support easing.
The Goods price index of +0.4% YoY includes deflation of -0.9% on Durable goods, and that could be a point of vulnerability for headline PCE inflation in a new tariff regime.
Disposable Personal Income (DPI) trends remained healthy by moving higher by +1.8% YoY from +1.3% on Jan 2025 but remained below the 2% handle results seen each month 2H24. The DPI YoY ran below PCE at +2.7% YoY.
Current dollar MoM DPI of +0.8% exceeded MoM PCE of 0.4% as savings rate ticked higher to 4.6% in Feb 2025 from 4.3% in Jan 2025. That leaves the Feb 2025 savings rates above the recent 2H24 highs of +4.3% in July.

The above time series updates “fed funds minus Core PCE” for a read on real fed funds and to what extent is it tightening as opposed to the “closet accommodation” we saw in much of 2H22 when tightening was moving into higher gear but badly lagging inflation. The long-term differential is +1.4%, and the market is just on top of that level now. There is not much room on that for an adverse move on Core PCE at current fed funds.

We had a question checklist in last month’s PCE commentary that framed some of the risk factors on the way into an aggressive tariffs policy framework (see PCE Jan 2025: Prices in Check, Income and Outlays Diverge 2-28-25). Some clarity is starting to enter into the risk handicapping. As of now, that is a negative factor as market volatility has reminded us all (see tariff links at bottom of this commentary).

The debate on the “Fed put” and “Trump put” has started to lose its conversation value, but the PCE price trends and fears of tariff fallout are not helping arm the FOMC with ammo to ease. That would require some payroll weakness and more significant economic data points to change the math. Trump is demanding lower rates now as he seeks some empirical support for the misguided view that “purchasing power” will not weaken whether you call it inflation or not. As we often point out, he still refuses to state that the “buyer pays.” He cannot state a basic fact, so that undermines the opinions.

We call it inflation and we also call it an erosion of purchasing power. That reality is intrinsic to the scale of the tariffs that could end up being “stacked” on top pf product tariffs. The tariff % levels being assigned are onerous. What has been signaled for next week’s Liberation Day (April 2) is bad for both expenses and prices. That is quite a combination. “Liberation” is a great metaphor, but the trick is not to do a bombing run over the city first.

The above chart updates the long-term time series for PCE vs. Core PCE across the decades and cycles. We see the 2.6% headline long term median (vs. current 2.5%) and the 2.4% core median (vs current 2.8%). That is better than where we came from in 2022 but short of the target.

We include a box of events to jog memories for the older crowd and a historical checklist for the new folks on the block. The 1973 to 1975 period was a turbulent one for domestic politics and geopolitics (Israeli war, Arab Oil embargo, the fall of Saigon, etc.) while 1979 offers some intense history in the Middle East also (Iran, fall of Shah). The 1980 to 1982 double dip recession saw the peak inflation fighting of the Volcker years. That was helped by rising oil production from non-OPEC sources (North Sea, Mexico, Alaska, the Lower 48, etc.) and a breakdown in OPEC discipline. Oil crashed in 1986.

The latest round of volatility will keep markets on edge for any more signs of stagflation, which was on the curse list for Nixon/Ford and later Jimmy Carter. The current market is the closest we have come to legitimate (vs. town criers) stagflation threats since the Carter years.

The above chart frames the long-term differential history between PCE and Core PCE. The long-term differential is zero and we currently stand at -0.3%. The volatility around that compressed long-term median flows into the energy wildcard with some food distortions also back in the 1970s. We look at some of the CPI energy and food inflation moves in separate commentaries (see Inflation: The Grocery Price Thing vs. Energy 12-16-24, Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23).

The oil wildcard will remain one that Trump and team want to work in their favor. Russian oil supply back on the market would satisfy that ambition even for Core PCE since the energy bill flows into goods and services costs and can impact PCE ex-Food and Energy. Lower energy costs also bolster consumer confidence in the peak driving season and are supportive of the ag sector and in easing freight and logistics costs.

Rooting for Russian supply for the wrong reason clearly has its limitations with the fate of Ukraine a sticking point. A more material trade clash with Canada and the overt hostility shown that country would be bad for the US and Canada and bad for oil prices as the largest importer of crude.

The above chart looks at a shorter timeline from 1997 to offer a better visual scale separate from the wild 1970s and 1980s. We see deflation at the post-crisis recession trough in mid-2009. We see the collapse in oil prices in late 2015 and then the COVID impact in 2020. Oil is a big headline mover whenever there is a sharp decline or spike, and we have had plenty of both.

The 1997 to 2024 period also shows a rare period at 2.0% PCE line and Core PCE median timeline. It took a lot to go wrong in that time horizon to cross that 2.0% threshold. The events along the way including oil crashes in late 2014 to early 2016 and a financial systemic crisis from 2008 to 2011 (including sovereign stress) to get us there.

The above chart covers the time horizon for DPI vs. PCE from early 2022 as the tightening cycle kicked into gear after March 2022. Life in Jan 2022 was still quiet for Disposable Personal Income, and we see Consumption still running ahead of DPI coming off bullish macro headlines in 2021. The 2021 period was a big macro rebound in GDP off the COVID peak period.

Oil was a problem after the Putin invasion of Ukraine in late Feb 2022, and inflation hit a high in June 2022 at +9.1% for CPI as a headline grabber (headline PCE at +7.1% in June 2022) before the steady inflation slide to current rates. The Core PCE has dueling peaks at +5.6% for Feb 2022 and Sept 2022.

For Feb 2025, both DPI is above the median at +0.9% and PCE is slightly below at +0.4%. Those are the types of levels that reassure on the current cycle, which is different from what might happen if we see more disarray in the markets tied to tariffs. Employers and consumers will have decisions to make as the side effects of tariff unfold. Policy makers might light the wrong fuse.

The above chart plots MoM Disposable Personal Income vs. PCE as a read on how wild things got during and right after the pandemic peak. These comments are somewhat of a replay each month with some edits and updates. This is a chart we use each month to revisit the DPI swings that came with the three COVID relief/stimulus packages. That included two under Trump and one under Biden. The most recent month(Jan 2025) shows a relatively material disconnect between DPI and PCE.

As a reminder, Trump signed the CARES Act in March 2020 (shows up in the DPI in April 2020) and Trump also signed the Dec 2020 legislation disbursed in Jan 2021 (he seldom mentioned that one since it was easier to blame Biden and Powell). Biden signed the America Rescue Plan (disbursed in March 2021) that was somewhat of a demand pile-on in a supply constrained environment (thus inflation). The DPI and PCE wave tied to each of those shows up in the chart above.

The vaccine was announced in early Nov 2020 just ahead of two stimulus actions. That was soon to be a factor in PCE patterns and lag effects. The quarterly GDP numbers in 2021 on the post-COVID bounce were numbers generally not seen since the Reagan and Clinton years (see Presidential GDP Dance Off: Clinton vs. Trump 7-27-24, Presidential GDP Dance Off: Reagan vs. Trump 7-27-24).

COVID was a distinct period for supply chains and supply-demand imbalances. With tariffs and potential trade wars, it will be important to look for similar imbalances whether in narrow product categories or in broad commodities and materials areas. Jacking up aluminum, steel, and seeking even more tariffs on lumber and new tariffs on copper is not a great idea for keeping prices and costs contained. Supply-demand factors are also timeless in significance. Washington spends too little time not discussing how it fits into their plans (since it often does not).

The typical political game into the 2024 election was to concentrate inflation cause-and-effect on the March 2021 disbursement. The idea is that a single stimulus plan signed by Biden in early 2021 was the cause of all inflation, which is a case of “dumbassery” and a sales pitch from the “politically axed.” That Biden plan certainly made things worse from the demand side. The invasion of Ukraine by Russia in Feb 2022 also drove the ensuing spike in inflation to a June 2022 CPI high 9.1%. That invasion was caused by Putin, who is somehow now in the favor of the current White House.

The above table plots the monthly Disposable Personal Income MoM change numbers vs. the Personal Consumptions Expenditures numbers across the years from 2019 through Jan 2025. It is an easy scan across key time periods for a look at turning points in DPI (e.g. stimulus payments) or PCE.

One exercise to do from time to time is to look at Table 1 in the monthly “PCE release” for the granular dollar amount on each line. While this month’s personal income pop of +0.9% is good news (see line 32 for the DPI total), the line items can show some volatility. We like to look for gaps between DPI and PCE.

Any reader of Table 1 can simply tick off which lines might come under pressure in coming weeks with DOGE and deportations and budget decisions and how those will flow into the various lines. There are some major lines such as Medicaid that serves a broad array of people on the lower rungs of the economic ladder (including a massive number of seniors and sick children).

The above chart takes the Personal Savings line from Table 1 in the PCE release after framing income vs. outlays. The 4.6% savings rate is the highest since 4.8% in June 2024. We have looked at the savings rate dynamics in earlier commentaries (see Savings Rates: Context Across the Cycles 10-27-23). Savings rates peak in times of worry (occasionally panic) as evident in the chart above. The period leading into May 1975 was no picnic while Nov 1981 and Dec 1992 had a raft of issues.

Sometimes there are anomalies during expansions such as in 1987 when the oil patch had basically crashed starting in 1986. Regional stress was high, and banks and thrifts were failing. People had to draw down savings or they saved to weather the storm. COVID and the various stimulus actions had a distorting effect on the numbers as well. The exercise is one of looking at the numbers and seeking out trend lines across the income and outlays disclosure.

The long-term median savings rate is 6.9%, and we remain well inside that level. Adjustments to income at the industry levels or stress in major regions can move multiple lines in what is a derived number. Radical adjustments to transfer payments tied to political tides (like the attack on Medicaid in recent legislation) could strain these numbers in 2025. The same for income lines as more get deported and cyclical conditions could lead to payroll pressure.

Tariff and Trade links:

Fed Gut Check, Tariff Reflux 3-22-2
Tariffs: Strange Week, Tactics Not the Point 3-15-25
Trade: Betty Ford Tariff Wing Open for Business 3-13-25
CPI Feb 2025: Relief Pitcher 3-12-25
Auto Suppliers: Trade Groups have a View, Does Washington Even Ask? 3-11-25
Tariffs: Enemies List 3-6-25
Happy War on Allies Day 3-4-25
Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25
Mini Market Lookback: Tariffs + Geopolitics + Human Nature = Risk 2-22-25
Reciprocal Tariffs: Weird Science 2-14-25
US-EU Trade: The Final Import/Export Mix 2024 2-11-25
Aluminum and Steel Tariffs: The Target is Canada 2-10-25
US-Mexico Trade: Import/Export Mix for 2024 2-10-25
Trade Exposure: US-Canada Import/Export Mix 2024 2-7-25
US Trade with the World: Import and Export Mix 2-6-25
The Trade Picture: Facts to Respect, Topics to Ponder 2-6-25
Tariffs: Questions to Ponder, Part 1 2-2-25
US-Canada: Tariffs Now More than a Negotiating Tactic 1-9-25
Trade: Oct 2024 Flows, Tariff Countdown 12-5-24
Mexico: Tariffs as the Economic Alamo 11-26-24
Tariff: Target Updates – Canada 11-26-24
Tariffs: The EU Meets the New World…Again…Maybe 10-29-24
Trump, Trade, and Tariffs: Northern Exposure, Canada Risk 10-25-24
Trump at Economic Club of Chicago: Thoughts on Autos 10-17-24
Facts Matter: China Syndrome on Trade 9-10-24
Tariffs: Questions that Won’t Get Asked by Debate Moderators 9-10-24
The Debate: The China Deficits and Who Pays the Tariff? 6-29-24
Trade Flows: More Clarity Needed to Handicap Major Trade Risks 6-12-24
Trade Flows: Deficits, Tariffs, and China Risk 10-11-23
Midyear Trade Flows: That Other Deficit 8-10-23
State of Trade: The Big Picture Flows 12-18-22

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