Key Inflation Gauge Cools, US Consumer Spending Misses Forecasts

(Bloomberg) — The Federal Reserve’s preferred inflation measures eased in November while consumer spending stagnated, suggesting the central bank’s interest-rate hikes are helping to cool both price pressures and broader demand — with more tightening on the way.

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The personal consumption expenditures price index excluding food and energy, which Fed Chair Jerome Powell has stressed is a more accurate measure of where inflation is heading, rose 0.2% in November from a month earlier, Commerce Department data showed Friday. That matched estimates, but data for the prior month were revised higher.

From a year earlier, the gauge was up 4.7%, a step down from a 5% gain in October. The overall PCE price index increased 0.1% and was up 5.5% from a year ago, the lowest since October 2021 but still well above the central bank’s 2% goal.

Personal spending, adjusted for changes in prices, stalled in November, the weakest since July and below forecast. An increase in services spending, led by restaurants and accommodation, offset a decline in outlays on merchandise. New vehicles were the leading contributor of that decrease.

Like the consumer price index figures released earlier this month, the figures point to a welcome retreat in price pressures and suggest the US has passed peak inflation. While many expect to see a rapid pullback in inflation over the next year, sustained wage increases from a still-tight labor market threaten to keep prices elevated.

Powell emphasized those risks last week when he said the central bank needs “substantially more evidence” to have confidence that inflation is on a sustained downward path.

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What Bloomberg Economics Says…

“Robust wage income and real income suggest the labor market has yet to cool meaningfully, and officials are unlikely to view this report as convincing enough to cause them to back off from a terminal fed funds rate above 5%.”

— Anna Wong and Eliza Winger, economists

For the full note, click here

Looking ahead, the central bank is expected to continue raising interest rates into next year — to a higher level than many investors had expected — and remain restrictive for some time. As for the size of any February rate hike, Powell said the decision will be based on incoming data, like Friday’s figures and others for December to be released throughout next month.

“It seems reasonable to expect people to become more cautious, now that they have run down about half of their accumulated pandemic savings, and labor market conditions are softening,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note.

While he sees consumption expanding at a robust pace in the current quarter, “we would be amazed if that pace is repeated in the first quarter of next year,” Shepherdson said.

The median estimates in a Bloomberg survey of economists were for a 0.2% advance in the core PCE price index and a 0.1% gain in inflation-adjusted spending. The S&P 500 fluctuated while Treasury yields bounced higher.

Consumer Weakness

The report indicates that consumers lost momentum last month amid higher interest rates and elevated inflation. While the strength of the jobs market and rising wages have bolstered household spending, Americans are tapping into savings and leaning more on credit cards, raising the question of whether consumers will be able to continue to drive economic growth through 2023.

The saving rate ticked up to 2.4% in November, the first increase since July but among the lowest readings on record, the Commerce Department report showed.

Inflation-adjusted outlays for merchandise dropped 0.6%, the worst since February, while spending on services rose 0.3%.

Many economists expect the US to fall into recession within the next year, but the outlook remains highly uncertain. That said, economic activity has generally accelerated in the second half of the year. Data out Thursday showed gross domestic product rose an annualized 3.2% in the third quarter, higher than previously estimated.

Wage Gains

Rising wages and lower gas prices gave many Americans the wherewithal to keep spending in November. Inflation-adjusted disposable income rose 0.3%. Wages and salaries, unadjusted for prices, were up 0.5% for a second month.

Sustained wage gains, particularly in service sectors, could keep inflation persistently higher than the Fed’s goal for some time, underscoring the importance of the labor market to officials’ decision-making in the months ahead.

More generally, economists expect the PCE price indexes to decelerate slower than the Labor Department’s consumer price index. By the end of next year, Fed officials anticipate core PCE inflation to be around 3.5%.

In addition to the softer consumer spending figures, a separate report showed more moderate demand for business equipment. Orders placed with US manufacturers for non-defense capital goods excluding aircraft rose 0.2% in November after a sharp downward revision to the prior month, according to Commerce Department. Total bookings for durable goods sank 2.1%, the most since April 2020. The data aren’t adjusted for inflation.

–With assistance from Matthew Boesler and Chris Middleton.

(Updates market trading)

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