Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Personal income growth surprised on the upside in January allowing consumers to keep spending; but after adjusting for inflation, real spending fell 0.1%. The Fed’s preferred gauge of inflation, the core PCE deflator, notched its biggest monthly gain since January 2023.Consumers Back to Prioritizing Non-Discretionary Spending
Consumer spending rose 0.2% in nominal terms in January, but after adjusting for the largest monthly increase in prices since September, real spending actually fell 0.1%. The increase in real spending for December got a bump up to 0.6% in the revisions, which helps explain the upward revision to Q4 real personal consumption expenditures in yesterday’s GDP revisions, but on balance today’s report presents some downside risk to Q1 consumer spending estimates.
Critically, the composition of spending in January represents a pivot back toward non-discretionary categories (particularly services categories) at the expense of outlays in recreational categories (chart). In nominal terms the three biggest categories for spending gains were, in order: housing & utilities, financial services & insurance and healthcare. The only goods category to post a nominal gain in January was food and beverages.