Inflation Eases in December While Consumer Spending Declines

The Commerce Department reported on Friday that consumers spent less in December, even as an inflation measure considered key by the Federal Reserve showed the pace of price increases easing.

Personal consumption expenditures excluding food and energy increased 4.4% from a year ago, down from the 4.7% reading in November. That was the slowest annual rate of increase since October 2021.

On a monthly basis, core PCE increased by 0.3%, which met estimates.

At the same time, consumer spending was even less than already modest estimates, indicating that the economy slowed at the end of 2022. This has led to expectations that there will be a recession in 2023.

Inflation-adjusted spending declined 0.2% in November, worse than the 0.1% drop that economists had been expecting.

Personal income increased in line with expectations in November, rising 0.2% from the previous month.

Fed officials are closely watching economic data to measure the impact of their rate increases on the economy. Inflation has persisted, but at a slower pace than what was seen in mid-2022. This is in line with other recent economic data.

The data shows that consumer spending is waning. Adjusted for inflation, real consumer spending declined 0.3%. This is a concern because consumer spending drives more than two-thirds of all U.S. economic activity.

Paul Ashworth, chief North America economist for Capital Economics, has said that even if real consumption returns to growth over the first few months of this year, the disastrous end to the previous quarter means that first-quarter real consumption growth will be close to zero. Ashworth now expects first-quarter GDP growth to decline at a 1.5% annualized pace.

The slowing pace of price increases could help consumers.

Headline inflation rose 0.1% on a monthly basis and 5% from a year ago. That number, which includes the volatile food and energy components, was the lowest annual rate since September 2021.

The inflation rate, as measured by the headline inflation rate, rose slightly on a monthly basis, but was still lower than it was a year ago. The headline inflation rate includes the volatile food and energy components, and the most recent data shows that the annual rate of inflation is the lowest it has been since September 2021.

According to Robert Frick, corporate economist with Navy Federal Credit Union, the overall decrease in consumer spending wasn't dramatic. At the same time, incomes rose and inflation fell. Frick believes that if inflation continues to fall at a steady rate, Americans should start feeling some financial relief this year.

The Fed watches core PCE closely as the measure takes into account changing consumer behavior, such as substituting lower price goods for higher-priced items, and strips out volatile food and energy prices. The Fed says that it watches the headline number, but officials have said that core PCE usually provides a better long-term indicator on where inflation is headed because it strips out prices that can be volatile over shorter time periods.

According to Friday's report, inflation pressures are continuing to shift from goods to services. This is in line with traditional patterns of economic activity in the United States, where more focus is placed on services than on goods.

Annual goods inflation rose to 4.6% in December, down sharply from 6.1% in November. Services inflation held steady at 5.2%. Goods inflation peaked in June 2022 at 10.6%, while services inflation bottomed at 4.7% in July.

In an effort to bring down runaway inflation, the central bank in 2022 raised its benchmark borrowing rate from near-zero in March to a target range of 4.25%-4.5%. This increase in the borrowing rate is intended to help control inflation and keep it at a manageable level.

There is a strong likelihood that the Federal Open Market Committee will increase interest rates by a quarter percentage point at its meeting next week, with another similar-sized hike expected in March. This is in line with market expectations, which are pricing in nearly certain increases in both meetings.

The Fed is expected to pause after a series of aggressive hikes in order to survey the economy. Officials hope that this will cool the labor market and reduce imbalances that have caused an inflation surge.