The New Personal Income Report Is Another “Good News Means Higher Rates” Story

The recent personal income and outlays numbers for January from the Bureau of Economic Analysis (BEA) will be more fodder for the Federal Reserve’s Federal Open Market Committee to continue staying the course with higher interest rates for a longer period of time.

Personal income increased $131.1 billion, or 0.6%, in January. Expectations were for a 0.4% increase. This is another indicator of wages, which apparently are going up. Disposable personal income (DPI) — what is left after taxes — was up by $387.4 billion, or 2.0%. Personal consumption expenses (PCE) had a $312.5 billion lift, or 1.8%.

“The PCE price index increased 0.6 percent in January. Excluding food and energy, the PCE price index also increased 0.6 percent,” the BEA wrote. “Real DPI increased 1.4 percent and Real PCE increased 1.1 percent; goods increased 2.2 percent and services increased 0.6 percent.”

These figures are in current dollars, which means unadjusted for inflation. In chained 2012 dollars, the DPI lift was 1.4%, while PCE increased by 1.1%.

“The increase in current-dollar personal income in January was led by an increase in compensation, reflecting private wages and salaries in both services-producing industries and goods-producing industries,” wrote the BEA. “Government social benefits decreased in January, reflecting a decrease in ‘other’ benefits that was partly offset by an increase in Social Security. The decrease in ‘other’ benefits primarily reflected the expiration of the extended child tax credit (as authorized by the American Rescue Plan) as well as a decline in one-time refundable tax credits issued by states. The increase in Social Security primarily reflected an 8.7 percent cost-of-living adjustment.”

“The personal income, spending and inflation data for January all showed an economy running too hot for the Fed and warrant a change to our forecast for the path of monetary policy,” wrote Oxford Economics. “We will be adding 50bps of rate hikes to our March baseline, lifting the target range for the federal funds to 5.25% to 5.50% by the middle of the year. Wage and salary income increased by the most since July, consumer spending was robust and the Fed’s preferred inflation gauge, the core PCE deflator showed an acceleration in inflation. We don’t expect the January pace of consumer spending to be maintained, but the Fed won’t count on that.”

Or, as Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, wrote in an email, “The Fed has much more work to do, and even if they only raise rates a couple more times, it is extremely unlikely that they will be cutting rates this year – as was consensus and in market-based pricing as recently as a few weeks ago.”