Personal income was flat month-on-month (m/m) in January, better than the consensus call for a decline of 0.3% m/m. December growth was revised up from 0.3% m/m to 0.4% m/m. Compensation of employees (+0.6% m/m) continue to be the driving force of higher income, with both private and government wages rising.
Removing the effect of price changes and taxes, real personal disposable income was down 0.5% m/m in January, while December’s decline was revised down to -0.3% m/m (from -0.2% reported earlier).
Nominal personal spending rose by 2.1% m/m in January, slightly above the consensus estimate (1.6% m/m). The December reading was revised down from -0.6% to -0.8% m/m.
- Goods spending gained 4.3% m/m from a downwardly revised decline of 3.2% in December (originally -2.6%). The strength was widespread, led by motor vehicles and parts, “other” nondurable goods, and recreational goods and vehicles.
- Services spending rose by 0.5% m/m growth in January, while the December reading remained unadjusted at +0.5% m/m. The gain was largely attributed to spending on housing and utilities.
In real terms, spending growth was up 1.5%, slightly stronger than market expectations (1.2% m/m).
The PCE price deflator rose by 0.6% m/m in January (as expected), which translated into 6.1% in year-over-year (y/y) terms (vs. 6.0% expected). Excluding food and energy, core PCE inflation was up 0.5% m/m (as expected) and 5.2% y/y (vs. 5.1% expected).
The personal saving fell to 6.4% from 7.9% in December.
Key Implications
The acceleration in spending is encouraging to start of the year and quarter. The strength in goods spending was anticipated in the retail sales report, but spending on services was a wild card amid Omicron-related uncertainty. Today’s report suggests that COVID impact on services spending was milder than during the previous waves.
High frequency indicators for most vulnerable high contact service activities – OpenTable seated diners and TSA checkpoint travel numbers – are now back to their pre-Omicron levels, which points to services gaining momentum in February. For Q1 2022, we are tracking real growth of 2.0%.
Today’s inflation reading leaves no doubt about the first rate hike in March. The Fed’s preferred inflation measure – the core PCE deflator – marks the eleventh month “above target.” The fog of war in Ukraine adds uncertainty to future rate hikes, especially if higher energy and commodity prices start impacting growth. The monetary policy path will remain data dependent and, as Governor Waller stated, whether “a more modest tightening” is appropriate “remains to be seen.”
