Highlights
Personal income in January came in moderately healthy while inflation picked up somewhat. Personal income in January slowed to a 0.3 percent gain, following a 0.5 percent increase the month before. January's advance exceeded the market forecast for a 0.2 percent increase. Within personal income, the wages and salaries component rose 0.5 percent after a 0.4 percent boost in December. On the spending side, personal consumption advanced 0.4 percent, after a 0.3 percent gain in December. The consensus projected a 0.2 percent rise in personal spending in the latest month.

However, inflation worsened in January as the overall PCE price index increased 0.4 percent, following a 0.3 percent boost in December. Even the core PCE price index firmed with a 0.3 percent gain in January after a 0.2 percent rise the month before. The latest number for the core equaled the consensus forecast for a 0.3 percent increase. Year-on-year headline inflation moved further away from the Fed's implicit target zone, coming in at 3.7 percent, compared to 3.6 percent in December. Core inflation, year-on-year, held steady at 2.2 percent in January.

Within the 0.4 percent boost in personal spending in January, the gain was led by a 0.6 percent jump in services and was supported by a 0.5 percent gain in nondurables. Durables fell 1.2 percent for the month, largely reflecting a decline in motor vehicle sales. The personal saving rate has been in negative territory for three months, ending with an unchanged minus 0.1 in January.

But inflation is eating into the consumer's buying power. After inflation is discounted, consumer spending was flat in January and in December. This will pull GDP growth down in the first quarter unless there are notable offsets elsewhere.

Today's report shows the consumer sector healthier than expected on the income side but also points to the growing problem of inflation. The Fed's forecast for a weak first half still seems to be on track based on flat real consumer spending. While the savings numbers are not very reliable in the national income accounts (personal saving is a "left over" category from income and spending), the recently negative numbers hint that consumers may be in a debt crisis of their own - an issue that is just beginning to be kicked around in the markets but could be an unstated reason the Fed apparently is so willing to cut interest rates in the face of rising inflation. Bonds will not like today's numbers but equities are likely to be uncertain about the impact.