Consumers Rejoice as the Holiday Season Approaches

There is nothing quite like falling prices to put a smile on consumers’ faces. When it comes to fuel, lower prices always seem to be welcome news.

Despite retailers' concerns about the holiday shopping season, American consumers appear to be undeterred. The Commerce Department reported on Friday that consumer spending rose by 0.1% last month, after jumping by 0.9% in October. The report also showed that inflation is cooling, with the Commerce Department's measure of consumer prices rising by just 0.1% in November after rising by 0.4% in October.

This indicates that consumer spending is on a strong footing for the current quarter. In October and November, average real spending was 3.3% higher than the monthly average in the third quarter. This is after the Commerce Department revised the third quarter's consumer spending pace upward to 2.3% from 1.7%.

On Friday, the University of Michigan released its final reading on consumer sentiment for December. The reading came in at 59.7, which is a dreary reading but better than November's 56.8. More important, the reading showed that consumers' year-ahead inflation expectations fell from 4.9% in November to 4.4% in December. This marks the lowest level since June 2021, which is an even better reading than it seems at first glance when considering people's tendency to overestimate inflation.

The main reason people are expecting less inflation is because gas prices have been falling. As of Friday, a gallon of regular gas averaged $3.10 nationally, according to AAA. This is the lowest price since June 2021, which means people have more money to spend elsewhere. However, it's not just gas prices that have been dropping lately. The Commerce Department's Friday report showed that prices for goods excluding food and energy items fell 0.4% in November after falling 0.2% in October.

Retailers are struggling as prices fall and consumers shift their spending to services like dining out. Real consumer spending on goods excluding food and energy items fell 0.8% in November from October, while spending on services excluding energy services rose 0.3%. This trend is bad news for retailers, who are struggling to clear bloated inventories and lure shoppers with discounts.

As long as the job market remains stable, it is likely that consumers will continue to increase their spending in the months ahead. This is good news for the economy, as it increases the chances that it will be able to weather the Fed's interest rate increases. 2023 could be a happy new year for the economy.