US consumer price data offers hope that rate hikes are working
KEY consumer price data from the US Commerce Department showed the second-smallest increase this year amid accelerated spending, offering hope that the Federal Reserve’s interest-rate hikes are cooling inflation without sparking a recession.
The personal consumption expenditures (PCE) price index, which excludes food and energy, rose 0.2 per cent in October from a month earlier. It was below forecasts. Federal Reserve chair Jerome Powell stressed this week that the PCE price index, released on Thursday (Dec 1), is a more accurate measure of where inflation is heading.
From a year earlier, the gauge was up 5 per cent, but a step down from an upwardly revised 5.2 per cent gain in September.
The overall PCE price index increased 0.3 per cent for a third month and was up 6 per cent from a year ago, still well above the central bank’s goal of 2 per cent.
Personal spending, adjusted for changes in prices, rose 0.5 per cent in October. It was a pickup from the 0.3 per cent advance seen in the month prior, and largely reflects a surge in outlays for merchandise.
Similar to consumer price index data released last month, the report shows that inflation remains too high, even though it is beginning to ease.
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While a deceleration is certainly welcomed, Powell said on Wednesday that the US is far from price stability and that it will take “substantially more evidence” to provide comfort that inflation is actually declining.
Policymakers are expected to continue raising interest rates into next year, albeit at a slower pace, and remain restrictive for some time.
The median estimates in a Bloomberg survey of economists were for a 0.3 per cent monthly increase in the core PCE price index, and a 0.4 per cent advance in the overall measure.
Stock futures extended gains and the yield on the 10-year US Treasury note remained lower.
Underpinned by a resilient labour market and sustained wage increases, the pickup in household spending suggested a solid start to fourth-quarter gross domestic product.
Inflation-adjusted outlays for merchandise jumped 1.1 per cent in October, fuelled by motor vehicle purchases. Spending on services climbed 0.2 per cent, boosted by outlays for accommodation and food services.
It is unclear, however, whether consumers will be able to maintain that momentum in 2023.
With inflation still outrunning pay gains, many households are leaning on savings, stimulus cheques from some state governments, and credit cards to keep spending. And there is growing concern that restrictive monetary policies will tip the US economy into recession.
The savings rate fell to 2.3 per cent in October, the lowest since 2005, the Commerce Department report showed.
Inflation-adjusted disposable income climbed 0.4 per cent, the most in three months. Wages and salaries, unadjusted for prices, increased 0.5 per cent.
Sustained wage gains, particularly in service sectors, could keep inflation persistently higher than the Federal Reserve’s goal for an extended period. This underscores the importance of the labour market to the Fed’s decision-making in the months ahead. BLOOMBERG
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