Disposable Personal Income Growth Lags Pace of Inflation

couple looking at finances

Inflation is strong. Consumer spending is strong.

Disposable income growth isn’t keeping pace. And personal saving as a percentage of disposable income is declining.

To that end, data released by the Commerce Department Friday (Oct. 27) shows that inflation is still with us, where the growth rate has barely budged. The Personal Consumption Expenditures (PCE) Price Index was up 0.4%, the same rate in August, and up from 0.1% on a monthly basis as measured at the beginning of the year.

But even as prices continued to rise, personal spending outpaced that upswing, and was up 0.7% in September. Drilling down, we note that spending on food off premises (read: groceries) was up 0.3%. Spending on clothing and footwear declined slightly.

Personal income was up 0.3% in September, well behind the increases in the prices paid at the register and spending, which in turn indicates that consumers are buying more at the register.

Personal Saving Rate Wanes

The personal saving rate, in September, stood at 3.4%, where the percentage had been 4% earlier in 2023. And, when adjusted for inflation, real disposable personal income was actually down, by 0.1% in the month.

The read across here is that U.S. consumers are facing pressure on their “spendable” incomes and are not replacing what goes out the door, so to speak, as fast as they might otherwise be able. We note that personal interest payments, which includes the interest obligations on debt, including but not limited to credit cards, was up 7% month over month in September.

The latest government data dovetails with PYMNTS intelligence data that shows consumers loaded up on their cards in the last several months, which would of course translate almost immediately into higher interest charges (and thus would show up in the PCE data, as mentioned above). In one recent report on “The Credit Economy,” we found that consumers, on average, spent a bit more than $2,200 on summer travel.

And, this past week, the Consumer Financial Protection Bureau (CFPB) announced that total outstanding credit card debt topped $1 trillion at the end of 2022, annual spending on credit cards increased to $3.2 trillion and average credit card balances returned to about $5,300, which is about the same as before the pandemic. As debt levels increase consumers paid more than $105 billion in interest and more than $25 billion in fees.

Separate research from PYMNTS earlier this year found that a minority of consumers — at 45% of card-holders — pay their balances in full, month after month. The data also show that more than a quarter of consumers had pulled money from savings to help manage their credit card debt. If savings rates decline, then that means this “dry powder” for managing/paying card debt, or simply keeping up with interest payments, becomes less of a reliable source.