PopKiller boutique, Los Angeles. Photo: Jeffrey St. Clair.
The Commerce Department released data on consumption and prices for the month of February today, and the picture is not good. Consumption is slowing and inflation is rising. Also, spending on health care continues to increase rapidly, which is bad news for the affordability gang.
Real Consumption Story
Starting with the consumption story, real consumption rose just 0.1 percent in February after being flat in January. In the last three months it grew at just a 0.8 percent annual rate. Many of us have noted that consumption seems to be driven largely by high-income people spending based on their stock gains. Now that stocks are no longer rising, perhaps that source of demand is dwindling.
I have looked at spending at fast food restaurants as a type of consumption that is unlikely to be affected much by stock gains. It effectively tells us how the bottom 80 percent of the income distribution are doing.
That story is not good. Over the last year, adjusting for inflation, spending is up just 0.3 percent. And it’s down 2.0 percent from its peak in September. It doesn’t look like most working people are feeling very good about the Trump economy.
Inflation Is Rising
The inflation rate had been consistently falling throughout 2023 and 2024. Most analysts had expected it to be at the Fed’s 2.0 percent target in 2025, or at least within spitting distance. We have seen a dramatic turnaround since Donald Trump took office. The overall personal consumption expenditure deflator (PCE) rose 2.8 percent over the year. Over the last three months, it has risen at a 4.1 percent annual rate.
The story with the core index is somewhat worse. The core PCE rose 3.0 percent over the last year. Over the last three months it has risen at a 4.4 percent annual rate.
Health Care Spending is Rising Rapidly
I have written before on how our measures of real wage and income growth may be overstated because they hugely understate the rate of health care cost growth that people see. The basic point is that out measures of health care inflation count the increase in the cost of specific items and procedures, like the price of Ozempic or hip replacement surgery.
Absolutely no one would think of this as the health care inflation they see. They would be thinking of the cost they pay for insurance, the deductibles, co-pays, and other out-of-pocket expenses. Although we cannot get a measure of this increase directly from the Commerce Department data, we can get some idea by looking at how much spending on health increases.
Here the story is not good. Spending on health care services rose by 7.8 percent over the last year, more than double the rate of inflation for the healthcare component of the CPI. The full story here would have to incorporate the increase in spending on prescription drugs and medical equipment, and also the extent to which these costs are being borne by patients rather than employers or the government. But it is virtually certain that what people are paying for health care has risen far more rapidly than the CPI inflation measure, which is a big hit to affordability.
This is Bad News, and It’s All Pre-War
The basic story here is that it looks like growth is slowing sharply and inflation is picking up. In the good old days, we called this “stagflation,” but we need some more data before tossing that word around. But the other point to keep in mind is that these are February data. It is all from the period before the Iran War sent oil prices soaring. Stay tuned for the March CPI out on Friday!
This first appeared on Dean Baker’s Beat the Press blog.
