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First Cut: January personal income up on gains in wages and salaries, spending up on durables and services, PCE deflator starts to inch uwpard

Personal income was up 0.6% in January, its strongest month-over-month increase since up 0.6% in February 2019. Wages and salaries were up 0.5% compared to the prior month, in part on mandated increases in minimum wages in a number of states. The annual COLA to social security benefits also helped boost incomes, as did rising rental incomes.

See On the radar from February 25 on mandated increases in minimum wages as of January 2020.

Personal consumption expenditures were up 0.2%, a mild increase that would have been more substantial except for the 0.2% decline in the dollar value of nondurables spending that was driven by falling prices for household energy costs, include a sharp fall in gasoline prices. Spending on durables was up 0.5% as consumers opted for pricier items like motor vehicles in the light trucks category rather than passenger cars, and bought goods related to a robust housing market like furniture and appliances, and building materials.

The PCE deflator was up 1.7% compared to a year-ago and was the highest since up 1.8% in December 2018. The core PCE deflator was up 1.6% compared to January 2019. Fed Chair Jerome Powell had said he and other policymakers anticipated that the PCE deflator would start to move past the factors that depressed the readings starting in January 2019. This appears to be the case. Inflation undershot the Fed’s 2% symmetric objective in January, but not as badly as it had and with some expectation that it could move even closer in the coming months.

If this is the case, as long as the labor market displays the muscle it has for some time and the economy maintains modest expansion, there will be no reason for the FOMC to lower rates again. I would expect we will be hearing from most — if not all — policymakers that short-term rates are appropriate and likely to be on hold for the foreseeable future even allowing for risks to the outlook like the outbreak of COVID-19.

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