May 1, 2019

CPI and Consumer Spending: How Will It Affect Stocks in 2019?

With the price of lettuce increasing by 15 percent over the past 12 months at the end of February, and television prices dropping 17 percent during the same period, according to the Bureau of Labor Statistics, these statistics show the dynamism of consumer goods.

Since consumer spending continues to make up approximately two-thirds of the U.S. economy, according to the St. Louis Fed, understanding how it impacts company earnings and future stock market movements is essential.

Surveying Consumer Spending

Based on the March 29 Bureau of Economic Analysis (BEA) release, consumers are facing more financial pressure. For the month of January, individual income fell by one-tenth of 1 percent, or $22.9 billion. The same month saw disposable personal income, or what’s left after taxes, fall by two-tenths of 1 percent or $34.9 billion. Personal consumption expenditures, or simply consumer spending as the BEA puts it, grew by one-tenth of 1 percent to $8.6 billion. 

The real personal consumption expenditures (PCE) inched up by one-tenth of 1 percent. The BEA defines PCE as a way to determine the prices that those residing in America spend on goods and services. It’s a way to calculate consumer behavior, along with determining if there is an increase in prices through inflation or if there’s a deflation in prices through deflation, for many consumer expenditures.

Additionally, the PCE price index fell by one-tenth of 1 percent. However, if energy and food are not calculated for January’s PCE price index, this figure increased by one-tenth of 1 percent. When it comes to consumer-related price indices, as the BEA explains, it removes factoring in food and energy to give a picture of consumables that are traditionally more price stable because these two categories are subject to extreme fluctuations.

Looking at Variations in Personal Income

When it comes to Americans and their sources of income, things are varied. The BEA report determined that personal income declined due to individuals receiving less dividend income, less interest income, along with farm owners’ income decreasing. However, government programs, primarily including assistance programs such as Social Security benefits and tax credits available through the Affordable Care Act (ACA) and the Child Tax Credit, slowed the decline in personal income.

Increases and Decreases in Prices Over Time

Different consumer goods, especially those needed on a regular basis, have increased on average by 1.5 percent over the 12 months ending February. Examples include accounting and tax return preparation costs increasing by 13.8 percent, health insurance increasing by 7.7 percent, seafood increasing by 9.1 percent and fresh vegetables up by 5.8 percent.             

In contrast to the above price increases, items traditionally considered luxuries have, on average, fallen in price. Examples include audio and video products declining by 8.9 percent, watches by 5.8 percent, recorded music and music subscriptions by 5 percent.

While this category includes all types of gasoline dropping by 9.1 percent, it’s worth noting because the price of gas can change rapidly. This is why the PCE is calculated with and without food and energy – to show how CPI can change from month to month.

While there’s no way to predict the future of consumer spending and its impacts on publicly traded companies’ stock performance, it shows that consumer spending is a big part of the U.S. economy.