U.S. January Core PCE Prices as expected, special factors bring some surprises elsewhere
January’s PCE price data, up 0.3% both overall and core (0.325% and 0.285% respectively before rounding) is in line with expectations, but significantly less alarming than the respective CPI gains of 0.5% and 0.4%. There were some surprises elsewhere, with income sharply ahead of spending and a massive surge in imports lifting the advance goods trade deficit to a fresh record.
Due to strong year ago data the yr/yr core rate slipped to 2.6% from 2.9% (December was revised up from 2.8%). An upward revision to Q4 data was released with yesterday’s GDP revisions, to 2.7% annualized from 2.5%, so inflationary pressures remain stubbornly above the Fed’s 2.0% target and January data is consistent with that. Overall PCE prices slipped to 2.5% yr/yr from 2.6%.
Personal income with a 0.9% increase is significantly stronger than expected and suggests bad weather was behind a weaker than expected 0.2% decline in personal spending, with underlying consumer fundamentals still looking solid. The savings rate at 4.6%, versus 3.5% in December, is at its highest since June.
Wages and salaries rose by a moderate 0.4%, with the strength in personal income being led by a strong rise in government social benefits, with half of that increase coming from Social Security, which saw annual cost of living adjustments. There were also strong gains in farm and personal dividend income which also look like one-time bounces.
Weakness in January retail sales, down by 0.9%, was already known, and largely blamed on bad weather and a correction from Q4 strength. Services with a 0.3% rise, 0.1% in real terms, were below trend, after respective gains of 0.7% and 0.3% in December, and may also have been impacted by weather.
January’s advance goods trade deficit of $153.3bn is an eye-catching record, dramatically up from December’s $122.0bn, itself up sharply from November’s $104.0bn.
Exports rose a moderate 2.0%, which is unimpressive after a 3.8% December decline but imports surged by 11.9%, which is almost certainly an attempt to beat threatened tariffs. The imports rise was led by a massive 32.7% rise in industrial supplies, which should support future business investment.
Advance January inventory data was mixed, retail down 0.1% despite weak sales but wholesale up by 0.7%. Weakness in consumer spending and a sharply wider trade deficit is negative for Q1 GDP, though the January data was clearly impacted by special factors and likely to be corrected in February and March.