Personal income grew 1.0% month-on-month (m/m) in January, a sizeable increase from December’s 0.3% gain, and above market expectations for a 0.4% increase.
Accounting for inflation and taxes, real personal disposable income was flat on the month relative to 0.2% growth in December.
Personal consumption expenditures rose 0.2% m/m, a notable deceleration from 0.7% growth in December, but in line with market expectations. Spending in real terms however fell by a -0.1%, led by weakness in goods spending (-1.1% m/m) even as services spending rose (+0.4% m/m).
On inflation, the Fed’s preferred inflation metric, the core PCE price deflator, rose from 0.1% to 0.4% on a monthly basis, but decelerated from 2.9% in December to 2.8% in January on an annual basis.
The personal savings rate rose in January to 3.8% from December’s 3.7% reading.
Key Implications
Given recent prints showing a notable pullback in spending and stalled inflation progress, today’s report was highly anticipated. Looking at spending, the deceleration in January was largely as expected, and in line with signals from the previously released retail spending report. After enjoying the holiday season, it appears consumers are now taking a breather. Reduced savings and a cooling labor market are likely to keep consumer spending at a modest pace for the remainder of the year.
The Fed’ s preferred measure of inflation continued its downward trek in January with the core PCE price deflator posting its 16th consecutive month of lower year-on-year growth. That said, at 2.6% the three month annualized rate of change on core PCE inflation rose above the Fed’s 2% target, (after falling below it last month to 1.6%) – a dynamic which could suggest some near term concerns. With the disinflation process progressing at an uneven pace while facing elevated upside risks and consumer spending starting to show some moderation, the central bank may be more inclined to continue exercising patience in its decision about when to cut rates.
