December headline PCE rose one tenth m/o/m and 3 tenths core with the former one tenth more than expected and the latter in line with the estimate. The y/o/y gains were 5% headline and 4.4% core. Goods prices were up 4.6% y/o/y, a continued slowdown for a 6th straight month. Services inflation was unchanged from the November print of up 5.2%. For those that eat, food prices grew 11.2% y/o/y and for those that drive, get on a plance, wear clothes, use plastic, heat their homes, etc… saw energy prices up by 6.9%.
Bottom line, another 25 bps rate hike next week will bring the fed funds rate to 4.5-4.75% which means that as measured against core PCE, real rates are FINALLY at about zero while the real rate vs headline PCE has narrowed to about -.25-.50%. As rent growth continues to slow, the very high services component will moderate and we’ll see where goods prices settle out at as many of the retail discounting has mostly run its course, used car prices likely drop further and commodity prices inflect higher again. The key to the inflation debate from here is not where inflation ends up bottoming on this downswing off 40 yr highs, could certainly have a 1 or 2 handle. It is instead where it settles out at after but that is something that we won’t really know about until 2024.
The December income and spending stats were as expected but inflation adjusted has personal spending down in the last 2 months of 2022 and why Q1 2023 will likely be negative as inventories give back the Q4 contribution and consumer spending remains modest. Private sector wages/salaries rose by .3% m/o/m and 5.4% y/o/y. Combining the rise in income and drop in spending saw the savings rate lift to 3.4% from 2.9% and off the near 65 yr low seen in September at 2.4%.
Bottom line, bond yields fell a few bps on the sluggish personal spending figure and in line core PCE. The market attention should be shifting here to living in a higher rate environment for longer and what slowing inflation means for revenue growth (reduces it) and what elevated wage growth (though no longer accelerating) means for profit margins (lowers it).
Core PCE

Savings Rate
