EconoFACTS

January 26, 2024 | 09:35

U.S. Consumer Spending Growth Accelerates in December, But Core Inflation Eases

The still-tight U.S. labor market continues to yield moderate income gains. Nominal personal income rose 0.3% in December, down from 0.4%, but spot on with the consensus forecast. The advance was led by a 0.4% upturn in wages and salaries as employers attempt to retain existing workers and attract candidates to fill open positions. The solid monthly gain pushed the year-on-year growth rate up to 4.7% from 4.6% in November, but down from 5.8% in January. Real, or inflation-adjusted, disposable income growth, the pacesetter for consumer spending, rose 0.1% in December. This is the smallest gain in three months and points to somewhat slower spending growth in the near term, as does a lower saving rate.

Consistent with the upside surprise to retail sales growth in December, nominal consumer spending rose 0.7% last month, nearly double the upwardly revised growth of 0.4% in November and the largest gain since September. Spending on goods climbed 0.8%, led by a 1.1% increase in spending on durable goods, while spending on services rose a more modest 0.6%, unchanged from November. The strong monthly gain drove the year-ago growth rate up to 5.9%, the fastest pace since July. Real consumer spending also posted a solid increase of 0.5% and is 3.2% higher than a year ago, the strongest gain since February 2022.

There was also encouraging news on the inflation front. The PCE deflator climbed 0.2% – in line with the consensus forecast – and is up 2.6% year-on-year, unchanged from November. More importantly for monetary policy implications, the core PCE deflator, which excludes food and energy and is the Fed’s preferred gauge of inflation, rose 0.2%. While this is double the 0.1% increase in November, the year-ago growth rate slipped to 2.9%. This is the first print with a 2-handle since March 2021.

Bottom line: All-in-all, this is a solid report marked by continued income growth, robust consumer spending gains and easing core inflation that should set the stage for Fed rate cuts later this year.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics