US consumer spending rebounded from a solid 1.3% in October, despite inflation, which has risen faster in the past year than at any time in more than three decades.
The Commerce Department reported Wednesday that the jump in consumer spending last month was more than double the 0.6% increase in September.
At the same time, consumer prices rose 5% compared to the same period last year, the sharpest 12-month gain since the same period that ended in November 1990. The increase in prices this year contributed to a 1.6% increase in spending in November. , yet adjusting for inflation, spending was still a solid 0.7% after an inflation-adjusted gain of 0.3% in September.
Personal income, which provides fuel for future spending growth, rose 0.5% in October, after falling 1% in September, a reflection of declining government aid payments.
Wages for Americans are rising as companies desperate for workers, and government stimulus checks from earlier this year further strained their bank accounts. That bodes well for a strong holiday season and major US retailers say they are readying after some companies, such as Walmart and Target, to make sure their shelves are full despite widespread shortages.
Analysts said the solid growth in spending in October, the first month in the new quarter, was encouraging evidence that overall economic growth, which slowed to a modest annual rate of 2.1% in the third quarter, would post a major rebound in the current quarter. . , unless the recent rise in COVID cases and concerns about inflation dampen holiday shopping.
In a cautionary note on Wednesday, the University of Michigan reported that the consumer sentiment index fell 4.3 percentage points to 67.4 this month, its lowest level since November 2011, driven by inflation concerns.
And there are regions in the US that are experiencing a surge in COVID-19 cases that could get worse as families travel to the country for the Thanksgiving holiday.
The 5% rise in consumer prices shown in Wednesday’s report continued a string of higher readings over the past several months as demand outpaced supply, reflecting a partial shortfall due to supply chains.
President Joe Biden on Tuesday took action to counter the hike in gasoline prices by ordering a release from the country’s Strategic Petroleum Reserve, but economists expect the move to have only minimal impact on rising gas prices.
Data released Wednesday, including a glimpse of what Americans are paying for everyday goods, is favored by the Federal Reserve because it tracks changes in what people are buying, unlike the consumer price index. which measures a certain market-basket of goods.
The Fed seeks to conduct its interest rate policies to achieve annual gains in its preferred price index of around 2%. However, over the past two decades, inflation has failed to reach the Fed’s 2% inflation target.
Fed officials at their November meeting announced the start of a $120 billion per month reduction in bond purchases that the central bank was making to put pressure on long-term interest rates.
This marked the Fed’s first maneuver to pull back on the massive support it was providing to the economy. Economists expect the Fed’s benchmark interest rate to rise in the second half of 2022, affecting millions of consumer and business loans. The rate has been at a record low of 0% to 0.25% since the pandemic hit in the spring of 2020.
And if inflation continues to exceed the Fed’s target, which Fed Chair Jerome Powell has described as fleeting for months, economists are looking forward to a quick reduction in the Fed’s monthly bond purchases as well as its first interest rate hike. increased barriers to action.
Wednesday’s report on spending and income showed that consumers increased their purchases of durable goods such as cars by 3.3% in October, while spending on non-durables such as clothing increased by 1.6%. Spending on services grew 0.9% in October.
With spending disproportionate to income, the personal savings rate fell to 7.3% in October, from 8.2% in September, but remained high.
Economists expect higher levels of savings to continue to support strong spending by Americans through the holiday shopping season and into next year.
“Although consumer confidence has declined due to high inflation, households have continued to spend,” said Gus Faucher, chief economist at PNC Financial. “Household income increased with increases in stimulus payments and unemployment insurance benefits.”