Tax Cuts Fatten Wallets as Rising Prices Keep Fed Hikes on Track

(Bloomberg) -- The U.S. economy showed signs of impending strength, as recent tax cuts boosted Americans’ spending power, unemployment claims fell to an almost five-decade low and a key price gauge watched by the Federal Reserve rose by the most in a year.

Real disposable income, or after-tax earnings adjusted for inflation, advanced 0.6 percent in January from the prior month, the biggest gain since 2015 and reflecting lower taxes, the Commerce Department reported Thursday. A measure of prices excluding food and energy rose 0.3 percent. A separate Labor Department report showed filings for unemployment benefits fell to 210,000 last week, the fewest since 1969.

With Fed Chairman Jerome Powell preparing to speak again Thursday on monetary policy, such data will reinforce expectations for a interest-rate increase later this month and at least two additional hikes this year. The data, covering the first month since the tax law was signed in December, reflected a $30 billion increase in one-time bonuses and a $115.5 billion annualized drop in personal taxes, the Commerce Department said. More income, along with a tight labor market, will help to sustain spending. 

The reduction in taxes helped boost the saving rate to 3.2 percent, the highest since August, from 2.5 percent in December, which was the lowest since 2007.

Nominal consumer spending grew 0.2 percent, matching the median forecast in a Bloomberg survey and following a 0.4 percent gain. Weaker purchases of automobiles contributed to slowdown in outlays.

Overall, nominal incomes rose 0.4 percent, more than the 0.3 percent median estimate of economists. Wages and salaries increased 0.5 percent after a 0.4 percent gain in the prior month.

While previous Labor Department figures for January showed the biggest annual increase in average hourly earnings since 2009, there’s little sign yet of a sustained acceleration in worker pay.

The Fed’s preferred price gauge -- tied to consumption -- rose 0.4 percent in January from the previous month and was up 1.7 percent from a year earlier. Inflation has mostly missed the central bank’s 2 percent target since 2012, though policy makers expect it to rise toward the goal.

The core index, which Fed officials see as a better indicator of underlying price pressures, was up 1.5 percent from January 2017, the same annual gain as the prior three months. That figure, along with the 0.3 percent monthly increase, matched economists’ estimates.

Adjusted for inflation, personal spending declined 0.1 percent in January from the prior month, the first decrease in a year.

--With assistance from Chris Middleton

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net.

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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