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Data released on Friday showed an impressive decline in personal income in April (it was expected) and the core PCE rising to the highest level since 1994. Analysts at Wells Fargo point out the 13.1% drop in April personal income masks broad-based growth in a variety of personal income sources that were washed out by the absence of stimulus checks. Regarding the PCE deflator rising up to 3.6%, they noted is another inflation indicator flashing red.

Key Quotes:  

“The fact that personal income plunged 13.1% was due entirely to payback from stimulus-charged gains in March. Excluding transfer payments, personal income actually rose 1.1% during the month, and wages and salaries notched a strong 1.0% gain.”

“After a year of remarkably strong growth, we expect some soft patches in goods spending and that was evident in today’s report.”

“The gain in spending partly reflects higher inflation. The PCE deflator, which is the Fed’s preferred measure of inflation, rose 0.6 compared to March. The year-over-year rate jumped to 3.6%. Excluding food and energy, core prices rose 0.7%, pushing the year-over-year rate to 3.1%, the highest since the early 1990s.”

“While the steep year-ago comparisons are largely attributable to low base effects after the lockdowns last April weighed on activity and prices, inflation is heating up.”

“Although these recent price gains are undoubtedly associated with the reopening of the economy, they could prove lasting and have the potential to eat into consumers’ purchasing power.”

“Our best read is that worries about inflation could rattle confidence for a while, but the relatively healthy balance sheets of households and their desire to get out will outweigh the downside from higher prices on spending, at least for now.”