Household income continued to grow in December, but rising prices limited how far paychecks went, the latest sign that consumers are proceeding cautiously.
Personal income rose 0.3 percent in December, down from November’s 0.4 percent increase, but on par with economists’ expectations, according to Friday’s release from the Bureau of Economic Analysis. Income, adjusted for inflation, was essentially flat, as the personal consumption expenditures price index (PCE), the Federal Reserve’s preferred inflation gauge, increased, indicating household purchasing power remains under pressure.
December’s PCE data showed price pressures remained persistent, continuing to limit inflation adjusted income gains. Economists say these measures provide a better understanding of what households can afford, though gains affect income groups unevenly, with higher earners generally seeing stronger income growth and spending power.
Taken as a whole, the income figures suggest that Americans are earning more, but higher prices continue to limit how far those gains stretch. December’s increase was partly supported by temporary transfer payments, or one time government payments, suggesting underlying momentum may be weaker.
Spending remained concentrated in services rather than goods, signaling consumer strength is uneven as price pressures persist. The figures reinforce expectations that the Fed will remain cautious on the timing of future rate cuts. That slowdown in buying power points to a weaker foundation for consumer spending.
“The source for future spending has weakened,” said Douglas Porter, chief economist at BMO Capital Markets. “Thus, momentum slowed as the year drew to a close.”
Persistent inflation has remained stubborn, eating into income gains and leaving households little room to spend. Economists caution the recent government shutdown may have temporarily clouded the latest growth picture.
Data showed that households prioritized spending on essential costs like housing, utilities, recreation and health care. Purchases of goods rose in gasoline and energy products but declined across most other durable and nondurable categories, signaling consumers are becoming more selective about discretionary spending.
The personal saving rate fell for a second consecutive month and remains low overall, a sign that rising costs continue to weigh on household finances.
Findings mirror the latest GDP data showing the U.S. economy slowed at the end of 2025 but remained supported by consumer spending. Inflation numbers have eased from earlier highs last year, but still remain above the Fed’s target.
Larger tax refunds from the Trump administration’s newly enacted tax cuts are expected to provide short-term relief to consumers, but continued price increases could lessen the impact. Taken together, the latest figures suggest inflation is not cooling enough to prompt Federal Reserve officials to begin cutting interest rates.
“We don’t see the new data will change the Fed’s calculations for the next meeting in a meaningful manner when it comes to rate cuts,” said Tuan Nguyen, an economist at RSM. “Inflation remains too serious of a concern that we need to cut interest rates.”