US consumer spending and inflation rise moderately amid interest rate hikes

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  • Consumer spending rises 0.1% in November
  • Core PCE Price Index Up 0.2%; up 4.7% year-on-year
  • The main orders for capital goods increased by 0.2%; shipments fall 0.1%
  • Sales of new single-family homes up 5.8%

WASHINGTON, Dec 23 (Reuters) – U.S. consumer spending barely rose in November, while annual inflation rose at its slowest pace in 13 months, but demand is likely not cooling fast enough to discourage the Federal Reserve from drive interest rates to higher levels next year.

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

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

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 forecast consumer spending rising 0.2%.

Part of the moderation in spending reflected a shift in demand from goods to services. Slowing price increases for some goods also reduced the dollar value of consumer spending.

Spending on long-term manufacturing fell 2.3%, driven by the drop in purchases of motor vehicles. There were additional obstacles to spending on household furniture and other equipment, as well as recreational goods and vehicles.

Spending on services increased by 0.7%, driven by housing and utilities, as well as financial services and insurance. They compensate for reductions in air transport services.

The personal consumption expenditure (PCE) price index rose 0.1% last month, after rising 0.4% in October. Food prices rose 0.3%, the smallest gain since December 2021. Energy goods and services prices fell 1.5%. Services prices, which can be sticky, rose 0.4%, reflecting housing inflation.

In the 12 months to November, the PCE price index increased by 5.5%. That was the smallest annual gain since October 2021 and followed a 6.1% advance in October.

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

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The Fed tracks PCE price indices for monetary policy. President Joe Biden welcomed the cooling of 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 a bottom-up, middle-out economy and I am optimistic for the year ahead,” Biden said in a statement.

Consumer prices rose less than expected for the second straight month in November. Consumers’ one-year inflation expectations also moderated in December, reinforcing the view that price pressures peaked several months ago.

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

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

Last week, the Fed raised its benchmark interest rate by 50 basis points to a range of 4.25% to 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 can be sustained. for a while.

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

However, consumer spending is on track to provide another boost to economic growth this quarter due to October’s solid rise and falling inflation. The economy grew at an annualized rate of 3.2% in the last quarter, after contracting in the first half of the year. The growth estimates for the fourth quarter come in at a pace of 3.7%.

Consumer spending is being supported by solid wage gains thanks to a tight job 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 higher borrowing costs, rapidly depleting savings and falling 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 remains near record lows.

Economists are cautiously optimistic that the Fed probably wouldn’t need to raise its benchmark rate much higher than currently projected, which would only result in a mild recession. It really depends on the job market.

“If inflation stays moderate, albeit slowly, and the Fed doesn’t raise interest rates much above 5%, the economy should experience a shallow slowdown,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.

A second Commerce Department report showed orders for non-defense capital goods, excluding aircraft, a closely watched gauge for business spending plans, rose 0.2% in November. The so-called basic orders for capital goods increased by 0.3% in October. Data are not adjusted for inflation.

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

Major capital goods shipments are used to calculate equipment expenditures in measuring GDP. Equipment spending remains on track to again support the economy this quarter.

A third report from the Commerce Department showed that new home sales rose for a second straight month in November, likely as Americans took advantage of a drop in mortgage rates and incentives from desperate home builders. The overall housing market, however, remains depressed.

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

Reporting by Lucia Mutikani; Editing by Dan Burns, Peter Graff and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.