Comment on Personal Income & Outlays report for December

December Personal Income & Outlays data, released this morning, show an economy grappling with high inflation and the emergence of the Omicron variant of COVID-19. According to the Bureau of Economic Analysis (BEA), American incomes rose slightly in December while consumer spending stumbled. Inflation rose to a 40 year high on a year-over-year basis, but the momentum of headline PCE price increases moderated somewhat on a month-over-month basis.

Looking ahead, we expect these data to worsen in January due to the spike in Omicron infections this month. Although, as this latest wave of COVID-19 passes we expect consumer spending growth to improve as Spring approaches – particularly for spending on in-person services. Tight labor markets continue to underpin strong wage growth which is helping to push personal incomes higher. We expect this trend to continue, although inflation will likely continue to offset much of these gains. While year-over-year (y/y) headline inflation rose to 40 year high in December, the month-over-month (m/m) reading eased somewhat due to moderating food and energy prices. As the pandemic subsides the rate of these price gains should begin to cool, but will likely remain elevated throughout the year.

Headline PCE price inflation came in at 5.8 percent y/y in December (the highest reading since 1982), vs. 5.7 percent y/y on November. The BEA also reported that Core PCE Inflation, excluding food and energy prices, rose to 4.9 percent y/y (the highest reading since 1983), vs. 4.7 percent y/y in November. On a month-over-month basis, headline PCE price inflation decelerated for a second month while core PCE price inflation accelerated for a third. Cooling food and energy prices are responsible for the difference in these two trends, and suggest that the inflationary momentum has become more deeply rooted in the economy. The primary drivers of inflation in December included vehicles, apparel, and furnishings.

Overall personal income rose 0.3 percent m/m (in nominal terms) in December, vs. 0.5 percent m/m in November. Employee compensation grew by 0.6 percent for a second month, but is down from the 1.0 percent m/m growth rates recorded earlier in the year. A contraction in proprietors’ income weighed on overall income growth for the month.  Recent increases in personal income have been more than offset by increases in prices, however. In inflation adjusted terms, personal income fell by -0.11 percent m/m – the fifth consecutive month of contraction. Thus, while Americans are currently seeing their incomes rise, they are seeing their purchasing power erode even more quickly.

Personal consumption expenditures fell 0.6 percent m/m (in nominal terms) in December following a 0.4 percent m/m increase in November.  Spending on services rose by 0.5 percent m/m while spending on goods fell by 2.6 percent m/m. Spending on durable goods fell by 4.1 percent m/m. In real terms, which accounts for inflation, consumer spending fell by 1.0 percent m/m in December with spending on goods dropping 3.1 percent m/m and spending of services flat. Front loaded holiday spending, the emergence of Omicron, and high inflation are responsible for the weakness recorded in December.