Highlights
Today's personal income report showed healthy income growth combined with modest core inflation. Consumer spending remains robust. Personal income increased 0.5 percent in December - the same as in November and matching the consensus forecast. The wages and salaries component advanced 0.6 percent in December, following a 0.4 percent gain in November. The wages and salaries component is the largest within personal income and is the component that has the biggest impact on consumer spending. Personal income is up 5.9 percent on a year-on-year basis in December, unchanged from November.

Personal consumption expenditures rose 0.7 percent in December, following a 0.5 percent increase in November. The consensus had projected a 0.5 percent boost in personal consumption for December. By components, personal consumption was led by nondurables, which jumped 1.6 percent in December after posting a 0.9 percent increase in November. About half of the December nondurables gain was price related as the nondurables price index surged 0.9 percent in December and was largely for gasoline and heating oil. Durables and services consumption also were strong with gains of 0.8 and 0.3 percent, respectively. Personal consumption is up 6.0 percent year-on-year in December, compared to 5.7 percent in November. The personal savings rate slipped to minus 1.2 percent in December from minus 1.0 percent in November.

Inflation data were boosted overall due to oil prices but were subdued at the core level. The overall PCE price index jumped to a 0.4 percent gain, following no change in November. Core inflation remained modest with a 0.1 percent rise in December, following no change in November. The consensus had projected a 0.2 percent increase in the core PCE deflator for December. On a year-on-year basis, the overall PCE deflator is up 2.3 percent in December, compared to up 1.9 percent in November. On a year-on-year basis, the core deflator was unchanged at up 2.2 percent.

Today's report shows a robust consumer sector with core inflation subdued. The bond market and equities will love the numbers. The only problem is that such a robust consumer and strong economy cannot continue and still have such low inflation numbers. This is good news for today, but the Fed knows we cannot have such a strong economy and such low inflation over the long run.