Implications:  Consumers started 2026 with healthy headline numbers on income and spending, but a rise in inflation ate up most of the new spending power.  On a positive note, private-sector wages and salaries rose 0.6% in January, while dividend income rose 2.0%.  Unfortunately, government transfer payments continue to rise at a faster pace. It should be noted that January typically sees an outsized increase in government transfer payments as cost-of-living adjustments to social security go into effect, and that was once again the case as social security payments rose 3.1% in January, while other transfer payments were partially offset by a decline in Affordable Care Act enrollments. Taken together, January transfer payments rose 0.8%.  Over the past twelve months, private sector wages and salaries are up 5.0%, while government transfer payments have risen 8.5%.  We hope to see private earnings rise at a faster pace than government transfers as we progress deeper into 2026, as private earnings are a more reliable (and desirable) long-term source of income.  On the spending front, personal consumption rose 0.4% in January, as a 0.7% increase in services was partially offset by a 0.4% decline in goods.  Services are up 6.3% from a year ago, compared to a 3.0% increase in goods.  The spending number sounds better than it was, however, with inflation representing the bulk of the increase. PCE prices – the Fed’s preferred inflation metric – rose 0.3% in January, while the year-ago reading now stands at 2.8%, above the 2.6% rate for the twelve-months ending in January 2025.  “Core” prices, which strip out the volatile food and energy categories, rose 0.4% in January, with the year-ago comparison moving up to 3.1%, up from the 2.8% reading for the twelve-months ending in January 2025.  Accounting for inflation, real consumption rose a modest 0.1% for a third consecutive month. It remains to be seen how geopolitical uncertainty, higher oil prices, and a subdued employment market will impact consumers’ propensity to spend in the months ahead.

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