U.S. Inflation Eases, Spending Holds Strong, Savings Shrink | CBC Economic Review

This week’s economic data includes: (1) PCE (Personal Consumption Expenditure) price index, personal income, and personal spending for October and November, (2) pending home sales for December, and (3) weekly initial jobless and continuing claims.

KEY SUMMARY:

Inflation is easing gradually but remains sticky due to persistent services-driven pressure; spending remains strong, but income and savings are weakening, leaving households more financially stretched and increasingly dependent on credit heading into the new year.

Inflation Trends: Inflation remained steady through October and November, with both headline and Core PCE rising 0.2% each month, slower than September and right in line with expectations. Services, especially non‑housing services, continued to put upward pressure on prices, keeping underlying inflation somewhat elevated. Even so, year‑over‑year readings held in the 2.7%–2.8% range, suggesting inflation is cooling gradually but not rapidly.

Income and Savings: Income growth softened in October and November, with personal and disposable income rising at slower rates and real disposable income flattening out. Year‑over‑year gains fell to their lowest levels since late 2022, and the savings rate declined to 3.7% and 3.5%, indicating that households are drawing on savings rather than relying on income to support spending. Overall, the data points to consumers becoming increasingly stretched financially.

Consumer Spending: Despite weaker income trends, consumer spending remained solid, rising 0.5% in both October and November, with October beating expectations. Goods spending strengthened—especially for vehicles, recreational items, and furniture—while services spending stayed steady across financial services, health care, transportation, and food services. Year‑over‑year spending remained above 5%, and real spending improved, showing consumers continued to fuel economic momentum heading into year‑end.

Commentary: Income growth has slowed and the savings rate has dropped to a three‑year low, even as consumer spending has stayed strong enough to support another quarter of solid economic growth. But with households becoming more financially stretched, credit conditions will matter more going forward—especially if a 10% cap on credit‑card rates is implemented and limits access to consumer credit.

Pending home sales plunged in December due to extremely low inventory and heightened economic uncertainty, marking the largest drop since 2020 and signaling continued weakness across most regions.

Pending home sales fell sharply in December, dropping 9.3% to an index level of 71.8 – the biggest monthly decline since April 2020 and far worse than expectations – despite typically slower winter activity. The downturn was broad‑based across all regions and driven largely by an 18% plunge in existing home inventory, which hit its lowest level since January and likely caused buyers to delay purchases. Additional pressure came from heightened economic uncertainty, slowing job growth concerns, and persistent shortages of entry‑level homes, which offset the benefit of easing mortgage rates. Year over year, pending sales were down 3.0%, with declines in every region except the South, underscoring ongoing supply constraints and a cautious buyer environment.

Weekly jobless claims and continuing claims both remained low, signaling a labor market that is still relatively stable, with no signs of rising layoffs or unemployment pressures.

Initial jobless claims ticked up slightly to 200,000 in mid‑January—still below expectations and lower than a year ago—while the four‑week average fell to its lowest level in a year, signaling no meaningful increase in layoffs. Continuing claims also declined to 1.849 million, beating expectations and coming in below last year’s levels, with the four‑week average slipping as well. Overall, both initial and continuing claims point to a labor market that remains stable and resilient, with no signs of rising unemployment pressures.

Equity and bond markets ended the week little changed overall, as geopolitical volatility and weak earnings weighed on stocks while Treasury yields steadied, and investors shifted expectations toward potential Fed rate cuts in July and December 2026.

Equity markets finished the week slightly lower after a volatile stretch dominated by geopolitical headlines, including President Trump’s push to acquire Greenland and renewed tariff threats toward Europe. A mid‑week “framework” for further discussions briefly lifted sentiment, but the lack of details kept investors cautious, driving safe‑haven flows into gold—which hit a record near $5,000—and pushing the U.S. dollar sharply lower. Earnings concerns added pressure, highlighted by Intel’s 17% drop on a weak 2026 outlook, while bank stocks were weighed down by worries that a proposed 10% cap on credit‑card interest rates could squeeze profitability. Major indexes posted modest weekly declines but remained positive year‑to‑date.

In the Treasury market, yields swung throughout the week as geopolitical tensions escalated and then eased, but ultimately ended little changed across the curve. Strong consumer spending and lower‑than‑expected jobless claims reinforced expectations that the Federal Reserve will keep rates steady for now, contributing to a stable yield curve. Rate‑cut expectations shifted slightly from last week, with markets now pricing in cuts in July and December 2026, while assigning almost no chance of a cut at the upcoming January FOMC meeting. If delivered, the two cuts would lower the upper bound of the federal funds rate from 3.75% to 3.25%.

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DETAILED ANALYSIS:

PCE Price Index & Personal Income and Outlays – October & November Update: 

(Originally scheduled for release on November 26 and December 19 but delayed due to the government shutdown)

PCE Price Index: The Bureau of Economic Analysis reported that the headline PCE price index rose 0.2% month-over-month in both October and November, down from 0.3% in September and in line with market expectations. The October increase was primarily driven by services (including portfolio management & investment advice, hospital services, and electricity), while the November increase reflected contributions from both goods and services (such as gasoline & other motor fuel and fuel oil for nondurable goods, and trust, fiduciary & custody activities for services).

On a year-over-year basis, headline PCE inflation rose to 2.7% in October (down from 2.8% in September) and 2.8% in November, matching expectations. October’s annual increase was supported by both goods (including motor vehicles & parts and jewelry & watches for durable goods, and food & beverages and fuel oils & other fuels for nondurable goods) and services (including household utilities, financial services charges & commissions, insurance, and health care).

The Core PCE Index—excluding food and energy and considered the Federal Reserve’s preferred inflation gauge—rose 0.2% in both October and November, unchanged from September and consistent with expectations. Services excluding housing were the main contributors, adding 0.21% to October Core PCE and 0.15% to November, indicating persistent upward pressure on Core PCE and sticky inflation. On an annual basis, Core PCE inflation rose 2.7% in October (down from 2.8% in September) and 2.8% in November, in line with market expectations.

Personal Income: Personal income increased 0.1% in October and 0.3% in November, down from 0.4% in September and below market expectations of 0.4% for both months. In both months, growth was driven primarily by employee compensation, particularly private-sector wages and salaries. Government social benefits, especially Medicare and Medicaid disbursements, also contributed to income gains. Year-over-year, personal income rose 4.3% in both October and November, down from 4.7% in September.

• Disposable personal income: +0.1% in October (down from +0.3% in September) and +0.3% in November month-over-month; annual increases of 3.9% in October (down from 4.3% in September) and 3.8% in November
• Real disposable income (inflation-adjusted): -0.1% in October (down from +0.1% in September) and +0.1% in November month-over-month; +1.2% in October (down from +1.5% in September) and +1.0% in November year-over-year, the lowest level since December 2022
• Personal savings rate: 3.7% in October (down from 4.0% in September) and 3.5% in November, the lowest level since October 2022

Personal Spending: Consumer spending rose 0.5% month-over-month in both October and November, up from 0.4% in September. The October increase exceeded expectations, while November was in line with forecasts. After contracting in September, consumer spending showed resilience in both October and November.

• Goods spending: +0.3% in October (up from +0.1% in September) and +0.7% in November
  • Durable goods: +0.5% in October (up from -0.5% in September) and +0.7% in November, primarily driven by recreational goods & vehicles and furniture & furnishings in October, and new motor vehicles – particularly domestic autos – and parts in November
  • Nondurable goods: +0.2% in October (down from +0.4% in September) and +0.7% in November, led by clothing & footwear and food & beverages in October, and gasoline & other energy goods and clothing & footwear in November
• Services spending: +0.6% in October (up from +0.5% in September) and +0.4% in November, primarily driven by financial services (notably securities commissions) and ground transportation in October, and health care, food services and financial services in November
  • Housing: +0.2% in both October and November (unchanged from September), notably softer than the 0.4-0.5% pace seen from January to August
  • Household utilities: +1.4% in October (up from +1.0% in September) and +0.2% in November
  • Hotel & motels: +0.2% in October (up from -0.5% in September) and flat in November

On a year-over-year basis, consumer spending increased 5.3% in October and 5.4% in November, up from 5.2% from September. Real consumer spending (inflation-adjusted) rose 0.3% in both October and November, compared with 0.1% in September. October again exceeded expectations, while November matched them. Annual real spending growth strengthened to 2.6% in both October and November, up from 2.4% in September.

Commentary: Income growth has slowed, and the saving rate has fallen to a three‑year low. Consumer spending, however, remained solid and resilient, keeping the economy on track for a third consecutive quarter of strong growth. Still, these trends suggest that households are becoming increasingly stretched financially. As a result, consumer credit conditions will play a more critical role in shaping the spending outlook – particularly if the proposed 10% cap on credit card rates is implemented, which could restrict the availability of consumer credit.

Pending Home Sales – December Update:

The National Association of Realtors reported December pending home sales based on its Pending Home Sales Index, which tracks signed contracts for existing homes—including single-family homes, condos, and co-ops—and serves as a one- to two‑month leading indicator for closed sales. The index uses MLS and large broker data to measure monthly changes against a 2001 baseline (Index = 100).

Pending home sales declined 9.3% to 71.8 in December, down from 79.2 in November, marking the largest monthly drop since April 2020. The December reading was significantly below both the prior month’s 3.3% increase and market expectations of a modest 0.3% decline. After adjusting for typically slower winter activity, the decline was unusually sharp given recent positive trends in pending contracts and closed sales, as well as easing home price appreciation and lower mortgage rates. It was also the steepest December decline since 2021 and was broad-based across all four regions, with the West posting the largest drop at 13.3%.

The downturn was primarily driven by a sharp 18% reduction in existing home inventory, which fell from 1.44 million in November to 1.18 million in December, the lowest level since January. Limited inventory likely caused buyers to delay purchases in hopes of more options. Additional factors include heightened concerns about slowing job growth amid economic uncertainty and persistent shortages of entry-level homes, which offset the benefits of declining mortgage rates.

On a year-over-year basis, pending sales fell 3.0%, with declines in all regions except the South. The West posted a 5.1% decrease, while the South—the nation’s largest housing market—recorded a 2.0% increase.

Jobless Claims – Week Ending January 17:

The Labor Department reported that initial jobless claims rose slightly, by 1,000 to 200,000 for the week ending January 17, up from 199,000 the previous week (revised from 198,000) and below market expectations of 209,000. Initial claims were also lower than the 222,000 filed in the comparable week last year, which may reflect fewer seasonal hires during the most recent holiday season. The four‑week moving average, which smooths weekly volatility, fell to 201,500—down 3,750 from the prior week’s revised average of 205,250 and the lowest level since January 13, 2024, when it stood at 200,000—indicating no significant pickup in layoffs.

Continuing claims, which track individuals receiving unemployment benefits and are reported with a one‑week lag, declined to 1.849 million for the week ending January 10. This was down 26,000 from 1.875 million (revised from 1.884 million) the previous week and below expectations of 1.890 million. Continuing claims were also lower than the 1.888 million recorded in the comparable week of 2025. The four‑week moving average dipped by 16,250 to 1.871 million from 1.887 million, signaling continued stability in the labor market.

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MARKET ANALYSIS:

Equity Market Weekly Recap

Equity markets ended the week with slight losses after a volatile trading period driven primarily by geopolitical tensions stemming from President Trump’s push to acquire Greenland and tariff threats toward European allies. Sentiment improved mid‑week after both sides announced a “framework” for future discussions on a potential Greenland deal, sparking a notable relief rally on Wednesday. However, investors remained cautious due to the limited details within the framework, and market anxiety persisted through Friday. This risk-off tone contributed to further gains in gold, which reached a new all‑time high of nearly $5,000 per ounce, and pushed the U.S. dollar sharply lower—both signs of heightened demand for safe-haven assets.

Weekly equity performance was also weighed down by weak earnings sentiment. Intel’s stock dropped 17% on Friday after issuing a weaker‑than‑expected revenue and profit outlook for the first quarter of 2026, highlighting investor concerns around longer‑term demand and competitive pressures. Additionally, bank stocks and the broader financial sector came under pressure due to a proposed federal cap on credit card interest rates, which raised worries about profitability and tighter consumer credit conditions.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -0.06% (weekly) & +1.12% (YTD), closing at 23,501
• S&P 500: -0.35% (weekly) & +1.02% (YTD), ending at 6,916
• Dow Jones Industrial Average: -0.53% (weekly) & +2.15% (YTD), closing at 49,099
• Russell 2000: -0.32% (weekly) & +7.54% (YTD), ending at 2,669

Treasury Market Update

Treasury yields were volatile throughout the week, driven largely by the escalation and subsequent deescalation of tensions surrounding the potential Greenland acquisition and related tariff threats against European nations. Despite the fluctuations, yields ended the week essentially unchanged across the curve compared to the prior week:

• 2-year yield: 3.60% (+0.01%)
• 5-year yield: 3.84% (+0.02%)
• 10-year yield: 4.24% (no change)

In addition, resilient consumer spending and lower‑than‑expected jobless claims—both signaling a stable labor market—reinforced expectations that the Federal Reserve will keep interest rates steady. This contributed to a relatively steady yield curve by week’s end.

Rate Cut Expectations

As in the past five weeks, However, unlike last week—when cuts were expected in June and December 2026—this week markets anticipate cuts in July and December 2026.

Currently, markets assign almost zero probability of a rate cut at the upcoming January 27–28 FOMC meeting. No cuts are expected for 2027. If implemented, the two cuts would lower the federal funds rate upper bound to 3.25%, down from the current 3.75%.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 1/27 (Tuesday):
  • Consumer Confidence (December)
• 1/28 (Wednesday):
  • FOMC Meeting
• 1/29 (Thursday)
  • Weekly Initial and Continuing Jobless Claims
• 1/30 (Friday)
  • Producer Price Index (PPI) (December)

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 01.23.2026 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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