January Personal Income & Outlays data, released this morning, show an economy grappling with the worst of the Omicron wave. According to the Bureau of Economic Analysis (BEA), American incomes remained flat in January, but consumer spending was strong. Both year-over-year and month-over-month inflation rates rose for the month as well, in part due to supply-side disruptions associated with the recent surge in COVID-19 infections. Looking ahead, we expect the recent invasion of Ukraine by Russian forces to prolong and perhaps exacerbate the ongoing wave of high inflation, especially for highly volatile food and energy prices.

Headline PCE price inflation came in at 6.1 percent y/y in January (the highest reading since 1982), vs. 5.8 percent y/y in December. The BEA also reported that Core PCE Inflation, which excludes food and energy prices, rose to 5.2 percent y/y (the highest reading since 1983), vs. 4.9 percent y/y in December. On a month-over-month basis, headline PCE price inflation was up slightly at 0.6 percent, vs. 0.5 percent in December, while core PCE price inflation remained at 0.5 percent for a fourth consecutive month. These data capture pricing trends during the worst of the Omicron wave, but do not yet incorporate rising energy prices resulting from the Ukraine situation.

Overall personal income growth was flat in January (in nominal terms), vs. up 0.4 percent m/m in December. While employee compensation grew by 0.5 percent m/m and proprietors’ income grew by 0.4 percent m/m, a reduction in government transfer payments (such as the unemployment payments) offset these gains.  Importantly, recent increases in personal income have been more than offset by increases in prices. In inflation adjusted terms, personal income fell by -0.5 percent m/m in January – the fifth consecutive month of contraction. Thus, while Americans have recently seen their incomes rise, they are seeing their purchasing power erode even more quickly.

Personal consumption expenditures rose by a healthy 2.1 percent m/m (in nominal terms) in January following a -0.8 percent m/m contraction in December.  Spending on services rose by 0.5 percent m/m while spending on goods rose by 5.2 percent m/m. Spending on durable goods rose by a robust 9.7 percent m/m, likely related to a pivot in spending patterns (from services to goods) associated with the Omicron surge. After accounting for inflation, consumer spending rose by 1.5 percent m/m in January with spending on goods rising by 4.3 percent m/m and spending of services remaining flat.

Personal income, consumer spending, and inflation will face new challenges in the months ahead. As the impact of COVID-19 on the US economy gradually wanes the conflict in Europe may take its place as the economic disruptor. Prior to Russia’s invasion of Ukraine we had expected some of the drivers  of inflation to moderate over the coming months. That view is changing. Russia is a key energy producer and supplies much of Europe with oil and natural gas. With conflict and sanctions likely curbing this supply, energy prices around the world will likely continue their recent climb, adding to inflationary pressures and creating further drag on households’ wallets.