WASHINGTON. US consumer spending rose a solid 1.3 percent in October, despite inflation accelerating over the past year faster than at any time in more than three decades.
The Commerce Department said Wednesday that the jump in consumer spending last month doubled the 0.6% gain in September.
At the same time, consumer prices rose 5 percent over the same period last year, the fastest rise in 12 months since the same period ending in November 1990. The rise in prices this year did indeed contribute to a 1.6 percent increase in spending in November. but after adjusting for inflation, spending still rose a solid 0.7 percent after rising 0.3 percent adjusted for inflation in September.
Personal income, which provides fuel for future spending increases, rose 0.5 percent in October after falling 1 percent in September, reflecting a decline in government support payments.
Pay for Americans is rising, companies are desperate for workers, and government checks have flooded their bank accounts earlier this year. This bodes well for a strong holiday season, with major U.S. retailers saying they are ready after some companies like Walmart and Target have gone out of their way to make sure their shelves are full despite widespread shortages.
Analysts said the strong rise in spending in October, the first month of the new quarter, is encouraging evidence that overall economic growth, which slowed to a moderate annual rate of 2.1 percent in the third quarter, will rebound significantly in the current quarter. until the recent surge in COVID-19 cases and inflation concerns dampen holiday shopping.
In a warning note on Wednesday, the University of Michigan said its consumer sentiment index fell 4.3 percentage points to 67.4 this month, its lowest level since November 2011, amid fears over inflation.
The 5 percent rise in consumer prices shown in the report on Wednesday has maintained a streak of strong over the past few months as demand outstrips supply, partly reflecting shortages due to disrupted supply chains.
President Joe Biden took action on Tuesday to counter the surge in gasoline prices by ordering a write-off from the country’s strategic oil reserves, but economists expect the move to have only minimal impact on gas price hikes.
The data released Wednesday, including data on how much Americans pay for fast moving consumer goods, is favored by the Federal Reserve because it tracks changes in what people buy, as opposed to the CPI, which measures a fixed market basket of goods.
The Fed is committed to pursuing its interest rate policy to achieve an annual gain of about 2 percent in its preferred price index. However, over the past two decades, inflation has consistently failed to reach the Fed’s 2 percent target.
Fed officials at their November meeting announced the start of a $ 120 billion a month cut in their bond purchases, which the central bank was undertaking to put downward pressure on long-term interest rates.
This was the first maneuver by the Fed to ditch the massive support it provided to the economy. Economists expect the Fed to raise its benchmark interest rate in the second half of 2022, affecting millions of consumer and business loans. That figure has been at an all-time low of 0 to 0.25 percent since the pandemic in spring 2020.
And if inflation continues to exceed the Fed’s target, which Fed Chairman Jerome Powell has called interim for months, economists are increasing the chances of an accelerated cut in the Fed’s monthly bond purchases, as well as earlier measures to its first rate hike.
An expense and income statement released Wednesday showed that consumers increased their purchases of durable goods such as cars by 3.3 percent in October, while spending on non-durable goods such as clothing rose 1.6 percent. percent. Service spending in October rose 0.9 percent.
As spending exceeded income, the personal savings rate fell to 7.3 percent in October from 8.2 percent in September, but is still high.
Economists expect strong savings rates will continue to drive up spending for Americans during the holiday shopping season and next year.
“Although consumer confidence declined in the fall due to high inflation, households continue to spend,” said Gus Faucher, chief economist at PNC Financial. “Household incomes rose sharply thanks to stimulus payments and an increase in unemployment insurance benefits.”