• Personal income was up 0.3% M/M in March which was a bit weaker than expected
• Spending was a bit stronger than anticipated with a 0.4% M/M gain
• Core PCE was stronger than expected and was up 0.2% M/M and 2.1% Y/Y

In March, personal income rose 0.3% M/M and 4.0% Y/Y. However, in real terms personal disposable income was flat. Personal spending was a touch stronger than expected with a gain of 0.4% M/M, following a rise of 0.1% in February. On a year ago basis, spending was still robust at 5.3% Y/Y. The Fed's preferred measure of inflation-the core PCE-was a bit stronger than expected at 0.2%M/M (and to three decimal places 0.169%) and 2.1% Y/Y. The three month annualized trend for the core PCE deflator was 2.0% in March and the six month annualized trend was 2.2%. Both were a bit lower than in February.

The two points the market will focus on in this report are the spending numbers and the core PCE deflator. Looking at the composition of spending, the lion's share was on services which saw a 0.6% M/M gain in March, while spending on durables fell 0.4% and spending on non durables was up 0.4% in March. But even though nominal spending was generally robust, in real terms it doesn't look so good. Real personal consumption expenditures were only up 0.1% in March, suggesting that most of the gains in the headline figure were due to price effects.

In terms of the inflation content of the report, there are indications that what the Fed said yesterday in the FOMC communiqué still holds. The core PCE deflator was up 0.169% in March, which is a relatively 'small' 0.2% when rounded. Moreover, the fact that the three and six month trends are still hovering around 2% suggests that the Fed's statement that "readings on core inflation have improved somewhat" is well corroborated.

On the whole, we already knew much of what would come out of this report given that first quarter GDP was released yesterday and we were able to estimate most of the data in today's report. The stronger than expected spending number is unlikely to remain so, as the consumer contends with numerous headwinds. And the fact that inflation trends appear tame suggests that the Fed may be able to cut rates further should the trend persist.

Charmaine Buskas
Senior Economics Strategist
TD Securities