:max_bytes(150000):strip_icc()/GettyImages-1960813409-321b74d410a54d0b9ff6b1f562f70f8b.jpg "Income Rose, Inflation Cooled In December As U.S. Economy Heads Towards Soft Landing")
- Income and Spending rose in December, while inflation cooled.
- Consumers freely used their new buying power, leading to a decline in the savings rate to its lowest in a year.
- Increasing spending and lower inflation added to evidence that the economy is coming in for a “soft landing” from recent high inflation, or that it’s already landed.
- The inflation data strengthen the view that the Federal Reserve could start cutting interest rates soon.
U.S. consumers have been getting more buying power lately, and they’re using it, as inflation continues to ease.
Personal incomes once again rose faster than prices in December, helping power a surge in spending, according to Personal Consumption Expenditures data released by the Bureau of Economic Analysis Friday. Personal income rose 0.3% from November while prices only rose 0.2%, and spending jumped 0.7%, the most since September.
Consumer prices rose 2.6% over the year, the same as in November, while “core” prices, a measure that excludes volatile prices for food and energy, were up 2.9%, the lowest since March 2021.
The slow inflation in Friday’s report is especially notable because officials at the Federal Reserve pay more attention to PCE inflation than the more widely watched Consumer Price Index, which showed inflation staying more stubborn in December. The lower inflation gets—it’s nearing the Fed’s target level of 2%—the sooner the Fed is likely to begin cutting its key interest rate from its current 22-year high.
As of Friday morning, markets were pricing in a 47% chance the Fed will begin to cut rates as early as March, according to the CME Group’s FedWatch tool, which forecasts rate hikes based on fed funds futures trading data. The likelihood of a rate cut rises to 90% by May, according to the data.
The data released Friday solidified 2023 as a year when the economy delivered healthy growth and lower inflation at the same time, in defiance of the expectations of many economists, who had expected the Federal Reserve’s campaign of anti-inflation interest rate hikes to drag the economy down into a recession. It added yet more evidence that the economy is coming in for a “soft landing” from the episode of high inflation of the past few years rather than a crash.
“I am sorry but we are no longer allowed to say ‘we are landing softly’ when we have been sitting on the runway for many months,” Arin Dube, a professor of economics at the University of Massachusetts Amherst, posted on X, the social media platform formerly called Twitter. “The great inflation of 2021/22 is over, and that’s it.”
One potentially worrisome data point: As people spent money faster than they earned it in December, they saved only 3.7% of their disposable income, the lowest level in a year.
However, taking a broader view, people earned more money and their dollars went farther because of lower inflation. After adjusting for inflation, after-tax income was up 4.2% over the year in December, and spending was up 3.2%.