American consumers defied rising inflation and market uncertainties in March, continuing to spend more on goods and services as their wages increased and they saved less.

Personal spending rose by 0.2% in March on an inflation-adjusted basis, following an upwardly revised 0.1% increase in February. The gain marked the third month in a row of increases in spending volume, according to data from the Commerce Department released on Friday.

Solid spending growth in the first three months of the year helped offset concerns over the unexpected contraction of gross domestic product in the first quarter.

Personal income increased by 0.5% on the month, not enough to offset the change in price level, which came in at 0.9%, according to the personal consumption expenditures price index. But most of the increase in the price index—the Fed’s key gauge for inflation—came from rising energy and food prices as a result of the Russia-Ukraine war.

Excluding food and energy, the core PCE price index pointed to a slight 0.3% increase month-over-month. That was the second straight month that core inflation rose at a 0.3% rate after a period of 0.5% increases from November of last year to January of this year.

The steady decline in core inflation has given rise to the idea that inflation has already peaked, at least with respect to core goods and services. On a year-ago basis, core inflation declined to 5.2% from 5.3% in the prior month.

While compensation growth remained steady, rising at 0.5% on the month, it still lagged inflation. What is more interesting is that such an increase contributed to the fastest growth rate of overall compensation in more than two decades on a quarterly basis, according to the employment cost index also released on Friday.

The index rose by 1.4% in the first quarter, driven by a sharp rise in benefits at 1.8%, while wage gains also increased by 1.2%. That suggests a major shift in firms’ compensation strategy that now focuses more on providing additional benefits on top of base salaries to attract workers as the labor market remains tight.

It will be interesting to see whether this is only a short-term strategy to deal with the current labor shortage or a long-term shift in compensation.

The resilience in spending was also driven by consumers saving less than during the pandemic. The savings rate in March reached a pandemic-low at 6.2%, down significantly from 6.8% in February. But drawing down on savings won’t likely continue to help low- and middle-income households maintain their spending if prices continue to rise.

The takeaway

We expect a bumpy road ahead for consumer spending as demand will continue to moderate. Inflation, the Russia-Ukraine war and tightening monetary policies remain headwinds to spending. As multiple rate hikes are expected to be in place, wage gains should slow down as labor demand declines in the next couple of months.