Hours: Monday - Friday 8:00 am - 5:00 pm


Spending remains strong as a key inflation gauge declines toward Fed's target

REAL ECONOMY BLOG | January 26, 2024

Authored by RSM US LLP

Inflation dynamics to close out last year strongly point to a near-term return to the Federal Reserve’s 2% inflation target amid a solid labor market, strong spending and real income gains.

The personal consumption expenditures deflator, a key gauge of inflation, rose by 0.2% on the month.

While both top-line and core inflation are rapidly advancing toward the Fed’s target, inflation-adjusted spending increased by 0.5% on the month and by 2.8% on a three-month annualized pace, according to government data released Friday.

Disposable income increased by 0.1% on the month and by 4.2% for the year on an inflation-adjusted paced.

The personal consumption expenditures deflator, closely watched by the Fed, reflected those dynamics, increasing by 0.2% on the month in both the top-line and core metrics while advancing by 2.6% on a year-ago basis and by 2.9% in the core.


In addition, at a three-month annualized pace, top-line inflation advanced at a rate of 0.5% on the month and by 2% at a six-month annualized pace.

The core rate on a three-month pace increased by 1.5% and the six-month pace rose by 2%. Those inflation dynamics in our estimation are creating the conditions for the long-awaited pivot by the Federal Reserve to begin reducing its policy rate.

Core PCE

The policy rate, which now sits at a range between 5.25% and 5.5%, is too restrictive given the disinflation now moving through the economy.

It is now appropriate the Fed at its meeting next week to change the forward guidance inside its statement to a more balanced stance in contrast with its December statement that illustrated a bias toward further rate hikes.

The data

Both income and spending finished the year on a robust note. Personal spending increased by 0.7% on a nominal basis and by 0.5% once adjusted for inflation.

Spending for the year advanced at a 5.9% nominal pace and a 3.2% inflation-adjusted pace. On a three-month annualized pace, real spending advanced by 2.8% in December.

Personal income increased by 0.3% on the month and by 4.7% year over year. Compensation, wages and salaries all advanced by 0.4% on the month, and disposable income increased by 0.3%. On a year-ago basis, compensation rose by 6.5%, wages and salaries increased by 6.8% and disposable income jumped by 6.9%.

The savings rate stood at 3.7%, down from 4.1% in November.

On a year-ago basis, goods inflation remained flat, durables fell by 2.3% and energy prices declined by 2.2% all of which capture the disinflation dynamics that are behind our view of the Federal Reserve’s policy path, with rate cuts starting midyear.

Non-durable goods inflation increased by 1.3% on a year-ago basis while services inflation increased by 3.9% year over year. Food prices went up by 1.5%.

The takeaway

Inflation dynamics inside the metric that the Fed uses to formulate policy strongly imply that the central bank will hit its inflation target in the near term.

This price stability will create the conditions in which the Fed pivots to a multiyear campaign of reducing its policy rate to a range between 2.5% and 3%.

Income and spending dynamics are equally encouraging. Disposable income increased by 4.2% on a year-ago basis, which should put a floor under household consumption once it moves through the traditional holiday hangover. Rising real income and wages should in turn bolster consumer confidence and support solid spending throughout the year.

Let's Talk!

Call us at (325) 677-6251 or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Joseph Brusuelas and originally appeared on 2024-01-26.
2022 RSM US LLP. All rights reserved.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Condley and Company, LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how Condley and Company can assist you, please call (325) 677-6251.

Share This