US inflation trending lower; consumer spending strong in December
US PRICES rose marginally in December, keeping the annual increase in inflation below 3 per cent for a third straight month, bolstering expectations that the Federal Reserve will start cutting interest rates this year.
The timing of the anticipated rate cut is, however, uncertain as the report from the Commerce Department on Friday (Jan 26) also showed consumer spending surging at the end of 2023 as Americans splurged over the holidays.
Financial markets have pushed the odds of a March rate cut to below 50 per cent in a nod to the economy’s continued resilience. The US central bank is expected to keep its policy rate unchanged at the current 5.25 to 5.50 per cent range at its meeting next week.
“The inflation trajectory is improving, giving the Fed leeway to cut rates this year,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “However, the Fed has further work to do and should not be tempted to declare ‘mission accomplished.’”
The personal consumption expenditures (PCE) price index increased 0.2 per cent last month after an unrevised 0.1 per cent drop in November, the Commerce Department’s Bureau of Economic Analysis said. Food prices rose 0.1 per cent and the cost of energy products increased 0.3 per cent.
In the 12 months through December, the PCE price index increased 2.6 per cent, matching November’s unrevised gain. The inflation readings were in line with economists’ expectations.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Excluding the volatile food and energy components, the PCE price index gained 0.2 per cent last month after rising 0.1 per cent in November. The so-called core PCE price index increased 2.9 per cent year-on-year, the smallest advance since March 2021, after rising 3.2 per cent in November.
The Fed tracks the PCE price measures for its 2 per cent inflation target. Monthly inflation readings of 0.2 per cent over time are necessary to bring inflation back to target, economists say.
The US dollar slipped against a basket of currencies. US Treasury prices fell.
On Thursday, the government reported that core PCE inflation increased at a 2 per cent annualised rate in the fourth quarter after a similar rise in the July-September quarter. Though prospects of a March rate cut have diminished, a reduction in borrowing costs is still expected by June. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.
Easing inflation, rising wages and households tapping their savings all combined to boost consumer spending and support the overall economy. Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 0.7 per cent last month after rising 0.4 per cent in November. There were gains in outlays of both services and goods.
Spending on services was lifted by financial service charges, fees and commissions as well as healthcare and gambling. Americans also stepped up purchases of new light trucks and spent more on prescription medication, clothing and footwear and recreational goods and vehicles.
When adjusted for inflation, overall consumer spending increased 0.5 per cent in December after a similar rise in the prior month. The solid increase in the so-called real consumer spending puts consumption on a higher growth trajectory heading into the first quarter.
The data was included in the fourth quarter’s advance gross domestic product report published on Thursday. Consumer spending increased at a strong 2.8 per cent rate last quarter, accounting for the bulk of the economy’s 3.3 per cent growth pace.
The pace of growth in consumer spending is, however, likely to moderate in the months ahead. Personal income increased 0.3 per cent in December after rising 0.4 per cent in November. The saving rate dropped to a one-year low of 3.7 per cent, from 4.1 per cent in November. REUTERS
Share with us your feedback on BT's products and services
