US inflation fell amid falling consumer spending

In December, US consumer spending fell, similar to the previous month, leading to slower economic growth ahead of 2023, while inflation continued to fall.
The Commerce Department report released on Friday also said December saw the smallest increase in personal income in eight months, partly reflecting modest wage growth but boding ill for consumer spending in the months ahead.
Consumer spending, which accounts for more than two-thirds of US economic activity, fell 0.2% last month. November’s data has been revised down to show a 0.1% decrease in spending instead of the 0.1% increase previously reported.
The data was included in Thursday’s preliminary fourth-quarter gross domestic product report, which showed consumer spending holding steady growth and helping the economy grow at a 2.9% year-on-year rate. .
Weak economic performance at the start of 2023 increases the risk of a recession in the second half of the year, but also reduces the need for the US central bank – the Federal Reserve – to maintain an overly aggressive monetary policy. The fastest cycle of Fed rate hikes since the 1980s led to a slowdown in the housing market. The manufacturing sector is also in the early stages of decline.
The higher cost of borrowing reduces the demand for goods which are generally purchased on credit. Spending on goods fell sharply in December, partly due to lower gasoline prices, which reduced the income of gas station owners.
Spending on durable industrial goods such as automobiles, leisure goods, furniture and household equipment fell 1.9%. Spending on durable goods fell 3.0% in November.
While rising service spending is helping to anchor consumption, some households, especially low-income ones, have depleted their accumulated savings during the COVID-19 pandemic, limiting growth.
Spending on services rose 0.5% last month, matching November’s increase. Service costs were covered by housing and communal services, air travel and health care, and recreation.
The personal consumption expenditure (PCE) index rose 0.1% last month after a similar rise in November. In the 12 months from December 2021 to December 2022, the PCE index increased by 5.0%. This is the smallest year-on-year gain since September 2021, after rising 5.5% in November.
Excluding food and energy prices, the personal consumption expenditure index rose 0.3% after rising 0.2% in November. The so-called Core PCE price index rose 4.4% year-on-year in December, its lowest level since October 2021 after rising 4.7% in November.
Adjusted for inflation, consumer spending fell 0.3% in December, the biggest drop in a year. The outlook for spending is bleak: Americans’ personal income rose 0.2% month-on-month. This is the smallest increase since April, after rising 0.3% in November.
Wages increased by 0.3% in December, as in November. But as inflation decreases, consumers’ purchasing power increases. Income available to households, adjusted for inflation, increased by 0.2%. The savings rate hit a seven-month high of 3.4%.