Softening of US data not enough to satisfy Fed

Washington — US consumer spending barely rose in November, while inflation cooled but not enough to discourage the Federal Reserve from driving interest rates to higher levels next year.

Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1%, the commerce department said on Friday. Economists polled by Reuters had forecast a rise in consumer spending of 0.2%. Data for October was revised up to show spending grew by 0.9% instead of by 0.8% as previously reported. 

Some of the moderation in spending last month reflected a shift in demand from goods to services. Slowing price increases for some goods also lowered the dollar amount of consumer spending.

Nevertheless, consumer spending is on track to provide another lift to economic growth this quarter, after teaming up with exports to boost GDP in the third quarter. The economy grew at a 3.2% annualised rate last quarter after contracting in the first half of the year. GDP growth estimates for the fourth quarter are as high as 2.7%.

Consumer spending is being driven by solid wage gains, thanks to a tight labour market, as well as savings accumulated during the first year of the Covid-19 pandemic.

The US central bank is trying to slow demand for everything from housing to labour as it fights to bring inflation back to its 2% target. Last week it hiked its policy rate by 50 basis points to a 4.25%-4.5% range, the highest since late 2007. Fed officials expect the rate to rise to between 5% and 5.25% next year, a level that could be sustained for a while.

Higher borrowing costs, rapidly depleting savings and diminishing household wealth could stifle consumer spending and tip the economy into recession next year.

The personal consumption expenditures (PCE) price index rose 0.1% last month after climbing 0.4% in October. In the 12 months to November, the PCE index increased 5.5% after advancing 6.1% in October.

Excluding the volatile food and energy components, the PCE price index gained 0.2% after increasing 0.3% in October. The core PCE price index rose 4.7% on a year-on-year basis in November after increasing 5% in October.

The Fed tracks the PCE price indices as a guide for monetary policy. Other inflation measures have also shown signs of slowing. Consumers’ one-year inflation expectations moderated in December, strengthening views that price pressures peaked several months ago.

Reuters