Implications: Despite surveys showing strong consumer spending in December; government data show a temporary lull, but this should not last. Purchasing power is up, even if you exclude government transfer payments. Excluding transfer payments, "real" (inflation–adjusted) personal income was up 0.4% in December and up 2.4% from a year ago. Real spending remains near record highs and will continue to move higher. Private-sector wages and salaries are up 4.6% from a year ago, which is faster than inflation. There were additional benefits paid to some social security beneficiaries in December which was due to retroactive payments to recent retirees based on a recalculation of the earnings base. In addition to the gain in wages and salaries, consumer spending is being supported by the large reduction in households' financial obligations the past few years. Recurring payments like mortgages, rent, car loans/leases, as well as other debt service, are now the smallest share of after-tax income since 1993. Also, autos are still selling below the pace of scrappage and growth in the driving-age population. This should lead to continued demand in the auto sector in the months ahead. On the inflation front, overall consumption prices are up 2.4% in the past year, above the Fed's supposed target of 2%. "Core" prices are up 1.8% from a year ago, the most since 2008. But, given the loose stance of monetary policy, we expect inflation to accelerate in the year ahead, both overall and for the core.
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Posted on Monday, January 30, 2012 @ 11:02 AM
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