Latest Personal Income Data: Inflation, Taxes and Income Growth

By at 26 January, 2024, 3:35 pm

by Raymond J. Keating –

U.S. personal income growth slowed in December, while consumption saw a strong increase, according to the latest personal income report from the U.S. Bureau of Economic Analysis.

Inflation as measured by the PCE (personal consumption expenditures) index, ran at 0.2 percent in December. Therefore, the nominal gain of 0.3 percent in personal income for December essentially got cut back to 0.1 percent in real terms. And real disposable personal income (i.e., personal income less personal current taxes) inched forward at 0.1 percent, which was a slowdown from the 0.5 percent gain in November and October’s 0.3 percent.

Disposable personal income is the most important income measure as it captures the level of income from which people consume, invest and save. And on a real, per capita basis, disposable income has been on a general growth track since mid-2022. It’s no coincidence, of course, that inflation started to calm at that point and afterward, and slowed its eating away at income. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

Meanwhile, real personal consumption expenditures grew by 0.5 percent in December, which matched the gain of 0.5 percent in November as well. So, while real income growth slowed in December, that was not the case with holiday spending apparently.

As we look ahead on income, it’s important to keep three key points in mind.

● First, income is affected by productivity, which, in turn, depends upon investments made by entrepreneurs, investors and businesses.

● Second, the level and growth of disposable income are, by definition, directly impacted by taxes, but also are affected by the impact that taxes have on, for example, entrepreneurship and investment.

● And third, real disposable personal income obviously also depends on inflation, with lower inflation feeding greater real income growth (again, see above chart).

Indeed, real disposable income is a measure that captures a great deal in terms of public policies, and the equation is straightforward: tax relief and low inflation are good news for disposable income and our economy.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.


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