Implications:  Consumers closed out 2025 with healthy growth in both income and spending, up 0.3% and 0.4% in December, respectively.  Unfortunately, the news on the income side is not quite as strong as the headline suggests.  Private-sector wages and salaries rose 0.2% in December, the slowest pace in six months, although they finished up a solid 3.9% for the year.  The largest driver of income gains in December came from transfer payments, rising 0.8%, although more than half of that increase came from a settlement paid by a utility company for the damage caused by the 2023 Maui wildfire.  Government transfer payments increased 0.3% in December, finishing up a massive 9.0% in 2025.  We hope to see private earnings rise at a faster pace than government transfers in the year ahead, private earnings being a more reliable (and desirable) long-term source of income.  On the spending front, personal consumption rose 0.4% in December, led by a 0.7% increase for services, partially offset by a 0.1% decline in goods spending.  Service spending rose 6.1% for all of 2025, compared to a 1.6% increase for spending on goods.  The bad news in today’s report is that inflation accelerated unexpectedly in December, with PCE prices – the Fed’s preferred inflation metric – rising 0.4% while the year-ago reading rose to 2.9%, above the 2.7% rate for the twelve-months ending in December 2024.  “Core” prices, which strip out the volatile food and energy categories, also rose 0.4% in December, as well, with the year-ago comparison moving up to 3.0%, matching the increase for the twelve-months ending in December 2024.  Interestingly, the tariff-sensitive goods category was not the primary driver of inflation in 2025, rising just 1.7% over the past year. Instead it was services that led the way, increasing 3.4% over the same period. This will be worth watching in the months to come as both headline and core measures remain stubbornly above the Federal Reserve’s 2.0% target.

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