U.S. personal incomes rose 0.7% in January, but higher inflation eroded most of the gains, the Commerce Department reported Wednesday.
Consumer inflation increased 0.5% in January on higher energy costs. Core inflation, which strips out food and energy costs to give a better view of underlying inflation pressures, increased 0.2%.
Core inflation has risen 1.8% in the past 12 months, down from 1.9% in December and just below the 2% lid the Federal Reserve would like to keep on inflation. It's the lowest year-over-year core inflation since March 2004.
Real disposable incomes - after inflation and after taxes - increased 0.1% in January, the weakest gain since August. Real disposable incomes are up 2.2% in the past 12 months.
Real consumer spending - adjusted for inflation - increased 0.4% in January, the weakest since October.
In nominal terms -- that is, not adjusted for price changes -- consumer spending rose 0.9%, the biggest gain since July.
The personal savings rate fell to negative 0.7%, the lowest since August. Savings have been negative for eight of the past 10 months.
The divergent inflation numbers - with headline inflation soaring 0.5% but year-over-year core inflation moderating - puts the Fed's dilemma in stark terms. While the Fed focuses on core inflation as its policy target, it cannot afford to unleash inflationary forces.
The Federal Open Market Committee is expected to boost its overnight lending rate to 4.75% in four weeks, and will likely add another rate hike in May or June, analysts say.
In the report, the government also revised third-quarter income figures higher by about $20 billion annualized. If past years are any gauge, fourth-quarter incomes could be boosted much higher in later revisions, as year-end bonus incomes are reported.
Income from wages and salaries increased 0.7% in January, the biggest increase since July.
Real spending on durable goods increased 1.3%. Real spending on nondurable goods also rose 1.3%. Real spending on services fell 0.3%, largely reflecting lower heating bills.