Personal Spending Slows in December as Income Grows, Inflation Steady at Elevated Levels

December personal income rose +.5% MoM (consensus +.4%, prior +.4%). Personal spending fell to a six month low in December, growing only +.2% MoM (consensus +.1%, prior +1%). The PCE deflator of total inflation eased back slightly to 3.5% YoY from 3.6% in November. Core PCE held steady at 2.2% YoY. The monthly change in core PCE also remained constant at +.2% MoM. The savings rate improved slightly to +.2% from zero, due to the fact that spending grew more slowly than incomes. Last month, inflation adjusted spending fell -.3% MoM for durable goods and -.2% MoM for non-durable goods, but services spending grew +.1% MoM. Disposable income, after taxes, rose +.5% MoM, but only rose +.2% when further adjusted for inflation. But this is an improvement over the declines of the prior two months. The slowdown in spending is going to be a concern for the economy. For all of 2007, personal spending rose only 5.7% YoY, the smallest increase in four years. When adjusted for inflation, spending barely grew last year. Personal income grew a tenth faster than spending in 2007 at +5.8% YoY, with wages and salaries growing +4.8% YoY. Over the past year, disposable income rose +5.6% YoY, but only +2.1% when adjusted for inflation. The PCE deflator remains elevated at +3.5% YoY. It has only been higher three months in the past 15 years. Core PCE, which excludes food and energy, spent the last quarter of 2007 at 2% or higher. The actual figure for December was 2.24% before rounding. This is above the Fed's desired range of 1-2%. Core PCE recently peaked at 2.5% in February of 2007.