Underlying inflation slowed to its slowest pace since October 2021
U.S. households turned cautious at the end of last year, cutting spending during the holiday shopping season and increasing savings, adding to signs of an economic slowdown.
Consumer spending fell a seasonally adjusted 0.2% in December from the prior month, the Commerce Department said Friday, the second straight monthly drop following solid spending increases during several months last year. Adjusted for inflation, spending fell 0.3% last month.
The pullback in spending came as inflation cooled, giving consumers some relief from rapidly rising prices. Households cut spending on goods as prices fell for gasoline and other energy products, the department said. They increased spending on services, where prices climbed.
U.S. stocks rose Friday with major indexes posting solid gains for the week, boosted by investors’ hopes that inflation is moderating.
The personal-consumption expenditures price index, the Federal Reserve’s preferred gauge of inflation, rose 5% in December from a year earlier, after increasing 5.5% in November.
The core PCE-price index, which removes volatile food and energy prices, rose 4.4% in December from a year earlier, its slowest pace since October 2021. That compared with 4.7% in November. The central bank aims for 2% annual inflation.
On a month-to-month basis, the PCE-price index rose 0.1% in December from the prior month, matching November’s increase. Core prices rose 0.3% in December from the prior month, up from November’s 0.2% increase.
The figures leave Fed officials on track to raise interest rates by a quarter-percentage point to a range between 4.5% and 4.75% at their meeting next week, where they also are expected to debate how much higher to raise rates this year. The Fed raised rates aggressively last year in a campaign to cool the economy and bring down high inflation.
“The actions of the Fed are leading to lower consumption,” said Efraim Benmelech, a professor of finance at Northwestern University.
He said higher interest rates are making mortgages more expensive and contributing to last year’s slump in home sales. That in turn leads to less spending on appliances, paint and other home goods, because people commonly buy those items ahead of a sale and after moving.
The U.S. economy grew at a 2.9% annual rate last quarter, the Commerce Department said Thursday, but entered this year with less momentum. Retail sales fell last month at the sharpest pace of 2022. Surveys of U.S. purchasing managers found that higher interest rates and inflation weighed on demand in January in the manufacturing and service sectors.
The labor market, meanwhile, has cooled some but remains tight with unemployment at 3.5%, matching a half-century low. Jobless claims—a proxy for layoffs—held near historic lows last week despite the spread of layoff announcements.
The personal saving rate increased to 3.4% in December from 2.9% in November as consumers earned more and spent less, the Commerce Department said.
The saving rate jumped sharply in the early months of the pandemic as at-home consumers spent less and the government distributed stimulus. It declined as the economy fully reopened and inflation rose. The rate hit a low point last September before starting its recent climb.
Personal income increased 0.2% in December from the prior month, compared with a 0.3% increase in November and 0.8% in October.
Consumers have shifted spending to services, which includes rent, dining out and travel, after focusing on goods earlier in the pandemic.
Spending on gasoline dropped 9% in December from the prior month, weighing on goods spending, and spending on new vehicles dropped 5.2%. Spending on services rose as consumers spent more on housing, healthcare and recreation.
Adam Halberg, chief executive of Barcelona Wine Bar, said his 19 tapas restaurants across the country have changed menu items to reduce use of ingredients that have risen in price. He said he had a strong holiday season compared with the previous year, when the Omicron variant led to lots of last-minute cancellations.
“It’s not revenge dining or revenge travel,” he said. “Going out to a great restaurant or a great bar is just back in a normal cadence of life for people.”
Jayne Navarre of Portsmouth, Va., has been carefully choosing where she spends because prices have risen for almost everything she buys. The law-firm marketer said she and her daughter recently went to a local restaurant for lunch and spent nearly $50 for the two of them, which was a significant increase from before.
“I was wondering if my glasses were foggy. Is that really a 4?” she said. “It’s the same food. It’s just more expensive.”