US consumer spending, inflation is rising moderately amid rising interest rates

  • Consumer spending rose 0.1% in November
  • Core PCE price index rose 0.2%; 4.7% increase year on year
  • Core capital goods orders increased 0.2%; Shipments decreased 0.1%
  • New single-family home sales increased by 5.8%

WASHINGTON (Reuters) – U.S. consumer spending barely rose in November, while annual inflation increased at its slowest pace in 13 months, but demand is likely not cooling fast enough to dissuade the Federal Reserve from pushing interest rates higher next year. .

A slowdown in economic activity heading into 2023 amid rising borrowing costs was also reported by other data from the Commerce Department on Friday showing a modest increase in orders for domestically manufactured capital goods last month. The US central bank is trying to slow demand for everything from housing to employment as it struggles to bring inflation back to its 2% target.

“The economy is moving in the right direction from the Fed’s standpoint, but not fast enough,” said Gus Foucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.1% after rising 0.9% in October. Economists polled by Reuters had expected consumer spending to rise 0.2 percent.

Some moderation in spending reflects a shift in demand from goods to services. A slowdown in price increases for some commodities has also reduced consumer dollar spending.

Spending on long-running manufactured goods fell 2.3%, led by lower vehicle purchases. There were additional spending impediments of home furnishings and other equipment as well as goods and recreational vehicles.

Spending on services rose 0.7%, supported by housing and utilities as well as financial services and insurance. They offset the decline in air transportation services.

The personal consumption expenditures (PCE) price index rose 0.1% last month after rising 0.4% in October. Food prices rose 0.3%, the smallest rise since December 2021. Prices for energy goods and services fell 1.5%. Services prices, which could be fixed, rose 0.4%, reflecting housing inflation.

In the twelve months through November, the PCE price index increased by 5.5%. This was the lowest annual gain since October 2021 and followed a 6.1% rise in October.

Excluding the volatile food and energy components, the PCE price index rose 0.2% after rising 0.3% in October. The so-called core personal consumption expenditures price index rose 4.7% year-on-year in November, also the smallest rise since October 2021, after rising 5.0% in October.

Reuters graphics

The Fed tracks the PCE price indices for monetary policy. President Joe Biden welcomed slowing inflation, which was evident in other price measures, but warned of bumps ahead.

“There will be more ups and downs next year, but we are making progress in building an economy from the bottom up and from the middle out, and I am optimistic for next year,” Biden said in a statement.

Consumer prices rose less-than-expected for the second consecutive month in November. Consumer expectations for inflation also eased for one year in December, reinforcing views that price pressures peaked several months ago.

Stocks fell on Wall Street. The dollar fell against a basket of currencies. US Treasury yields rose.

Reuters graphics

Solid wage gains

“Inflation continues to slow, which is good news for the Fed’s most important target, but unfortunately for the market, this is happening at the same time that consumers are cutting their spending,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. In Charlotte, North Carolina.

Last week, the Fed raised the interest rate by 50 basis points to a range of 4.25%-4.50%, the highest since late 2007. Fed officials expect the rate to rise to between 5.00% and 5.25% next year, a level that could be sustained. briefly.

When adjusted for inflation, consumer spending was flat last month after rising 0.5% in October.

However, consumer spending is on track to deliver another boost to economic growth this quarter due to the strong increase in October and subdued inflation. The economy grew at an annual rate of 3.2% in the latest quarter after contracting in the first half of the year. Growth estimates for the fourth quarter are at 3.7%.

Consumer spending is supported by strong wage gains, thanks to a tight labor market, as well as savings accumulated during the first year of the COVID-19 pandemic.

Personal income rose 0.4% last month, with wages rising 0.5%. But high borrowing costs, rapidly depleting savings and diminishing household wealth could stifle consumer spending and tip the economy into recession next year.

Although the savings rate rose to 2.4% from 2.2% in October, it was still near record lows.

Economists are cautiously optimistic that the Fed probably won’t need to raise its policy rate much higher than currently expected, which will lead to only a mild recession. Much depends on the labor market.

“If inflation continues to moderate, albeit slowly, and the Fed doesn’t push interest rates above 5%, then the economy should avoid a shallow deflation,” said Sal Guaterie, chief economist at BMO Capital Markets in Toronto.

A second report from the Commerce Department showed orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.2% in November. These so-called core capital goods orders increased 0.3% in October. Data has not been adjusted for inflation.

Slowing price increases, a strong dollar, and a shift in spending from goods to services likely contributed to the moderation in orders. Shipments of core capital goods fell 0.1% after increasing 1.4% in October.

Shipments of core capital goods are used to calculate equipment spending in the GDP measure. Equipment spending is still on track to support the economy again this quarter.

A third report from the Commerce Department showed new home sales rose for the second straight month in November, likely as Americans benefited from falling mortgage rates and incentives from desperate builders. However, the overall housing market is still in the doldrums.

“We see a limited uptick in new home sales in the coming months, but incentives for homebuilders and the recent decline in mortgage rates may keep sales lower,” said Nancy Vanden Houten, chief US economist at Oxford Economics in New York.

(Reporting by Lucia Mutecani) Editing by Dan Burns, Peter Graf and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

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