Personal income grew 0.3% month-on-month (m/m) in December, a small step down from November’s 0.4% gain and in line with market expectations.
Accounting for inflation and taxes, real personal disposable income rose 0.1% m/m, a slowdown from the upwardly revised 0.5% in November (0.4% previously.)
Personal consumption expenditures rose 0.7% m/m, an acceleration from the upwardly revised 0.4% gain recorded in November, and ahead of market expectations (0.4%). Spending in real terms also grew by a robust 0.5% for the second consecutive month.
Spending on services was up by 0.6% m/m and goods spending rose by 0.9% m/m. Within services, the largest contributors to the increase were financial services and insurance, health care, and recreation services. Within goods, the leading contributors were motor vehicles and parts, other nondurable goods (led by prescription drugs), and gasoline.
On inflation, the headline personal consumption expenditure (PCE) deflator rose 0.2% m/m, an uptick from last month’s decline (-0.1%), but the yearly measure held steady at 2.6% y/y. The core PCE price deflator (which is the Fed’s preferred measure of inflation) ticked up marginally to 0.2% on a monthly basis but decelerated from 3.2% in November to 2.9% in December on an annual basis.
The personal savings rate declined in December to 3.7% from November’s 4.1% reading.
Key Implications
There isn’t much of a surprise in today’s report given yesterday’s GDP release. Consumers continued to defy the odds and kept spending to close out the year. December’s outturn was even stronger than November’s with consumers saving less to keep spending. With the holidays behind us however, and consumers still facing headwinds, the drive to spend is likely to lessen in the new year. As such, consumer spending is anticipated to decelerate to a more sustainable pace.
The Fed’ s preferred measure of inflation continued its downward trek in December with the core PCE price deflator posting its 15th consecutive month of lower year-on-year growth. The measure dipped below 3% for the first time since March 2021. With inflation heading in the right direction, but still above target, and consumer spending displaying noteworthy resiliency, the central bank has even less urgency for a rate cut and one is unlikely to occur before mid-year.
