An important Fed measures had been eased, spending additionally fell

Consumers spent less in December even though a measure of inflation considered key by the Federal Reserve slowed the pace of price increases, the Commerce Department reported on Friday.

Personal consumption spending excluding food and energy rose 4.4% year-on-year, down from 4.7% in November and in line with the Dow Jones estimate. That was the slowest annual growth rate since October 2021.

On a monthly basis, so-called core PCE rose 0.3%, also in line with estimates.

At the same time, consumer spending was still below already modest estimates, suggesting the economy slowed in late 2022 and contributing to expectations of a 2023 recession.

Inflation-adjusted spending fell 0.2% for the month, worse than the 0.1% drop Wall Street had been expecting. This was despite a 0.2% increase in income, which was in line with estimates.

Personal income rose 0.2% for the month, as expected.

The numbers come from Fed officials who are closely monitoring how their rate hikes have affected the economy. In line with other recent economic data, they show persistent inflation, albeit at a slower pace than the levels that pushed price increases to their highest levels in more than 40 years in mid-2022.

But the data also shows that consumer spending, which drives more than two-thirds of all US economic activity, is slowing. Adjusted for inflation, real consumer spending fell by 0.3%.

“Even if real consumption picks up again in the early months of this year, the disastrous end to the previous quarter means real consumption growth will be close to zero in the first quarter,” said Paul Ashworth, chief North American economist at Capital Economics. Ashworth now expects Q1 GDP growth to decline by 1.5% on an annualized basis.

Consumers could benefit from slowing price increases.

Headline inflation rose 0.1% monthly and 5% yoy. That figure, which includes food and energy volatile components, was the lowest annual rate since September 2021.

“The overall decline in consumer spending has not been dramatic, and at the same time incomes have risen and inflation has fallen,” said Robert Frick, a business economist at Navy Federal Credit Union. “Especially if inflation continues to fall steadily, Americans should start to feel some financial relief this year.”

The Fed is closely monitoring the core PCE as the measure reflects changing consumer behavior, such as B. replacing lower-priced goods with higher-priced items, and excluding volatile food and energy prices.

Friday’s report shows the ongoing shift in inflationary pressures from goods that were in high demand in the early days of the pandemic to services on which the US economy has traditionally been focused.

On an annual basis, goods inflation rose by 4.6%, down sharply from 6.1% in November, while services inflation remained stable at 5.2%. Goods inflation peaked at 10.6% in June 2022, while services inflation bottomed at 4.7% in July.

In an effort to stem runaway inflation, the central bank raised interest rates in 2022 from near zero in March to a target range that now stands at 4.25% to 4.5%.

Markets are almost certain of another quarter point hike in Federal Open Market Committee policy next week, followed by the likelihood of a similarly large hike in March.

The Fed is then expected to pause while examining the impact the series of aggressive rate hikes has had on the economy. Officials are hoping to cool down a red-hot job market and reduce supply-demand imbalances that have fueled the surge in inflation.

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