By Nathalie Voit

U.S. consumer spending declined by 0.6% in December amid ongoing inflation and Omicron-related fears that pushed consumers to start spending earlier in the holiday season, the Commerce Department said in a news release on Jan. 28. 

Personal consumption expenditures (PCE) decreased $95.2 billion, or 0.6% for the month. Households’ income increased $70.7 billion, or 0.3% in December, the department said. However, last month’s income gains were insufficient to offset record year-over-year price increases.

As tracked by the PCE index, overall inflation rose 5.8% in the 12 months leading through December and 0.4% for the month, the department said. 

According to the department, core inflation, which excludes the volatile categories of food and energy, rose 0.5% in December and 4.9% from a year earlier, its fastest annual increase since September 1983. 

Adjusted for inflation, real disposable personal income (DPI) declined 0.2% from November. Real DPI has now decreased for the fifth consecutive month, and in eight of the last nine months, the agency said.

Spending on goods in December decreased by 2.6% from the previous month. Spending for services rose 0.5%, mostly led by increased spending on Omicron-related healthcare.

The falloff in goods spending was driven by ongoing supply-chain bottlenecks that have left a dent in inventory and contributed to persistent price increases. Additionally, many consumers began shopping earlier in the holiday season out of fear of catching the COVID-19 virus during the traditional peak shopping days, cutting into PCE in December, the department said.

“Early holiday shopping prompted by supply-chain worries, higher prices and the spread of Omicron led consumers to tighten their purse strings in December,” said Oxford Economics chief U.S. financial economist Kathy Bostjancic, according to Barron’s. 

Bostjancic said she expects spending to pick up again after the Omicron-driven COVID-19 winter surge. She predicted consumer spending to grow by 3.5% in 2022 as Americans benefit from a tighter job market, greater personal income, and more savings. 

The news arrives as overall compensation climbed 4.0% year-over-year in the fourth quarter and wages and salaries surged 4.5%, according to the Employment Cost Index from the Department of Labor (DOL). 

Both metrics posted the fastest rate of increase since data was first collected two decades ago, the DOL said. However, the figures were still not fast enough to keep up with inflation, which is running at historically high levels in the U.S.