United States consumer spending recovered by a solid 1.3 percent in October despite inflation accelerating faster over the past year than it has at any point in more than three decades.
The jump in consumer spending last month was double the 0.6 percent gain in September, the Department of Commerce reported Wednesday.
At the same time, consumer prices rose by 5 percent compared to the same period last year, the fastest 12-month gain since the same period ending in November 1990. The rise in prices this year did contribute to the 1.6 per cent rise in spending in November, yet adjusted for inflation, spending was still a solid 0.7 per cent after a 0.3 per cent inflation-adjusted gain in September.
Personal income, which provides the fuel for future spending increases, rose 0.5 percent in October after falling 1 percent in September, reflecting a drop in government support payments.
Pay for Americans is on the rise with companies desperate for workers, and government stimulus checks earlier this year further replenished their bank accounts. This bodes well for a strong holiday season and major US retailers say they are ready after some companies, such as Walmart and Target, went to great lengths to make sure their shelves were full despite widespread shortages.
Analysts said the solid increase in spending in October, the first month of the new quarter, was encouraging evidence that overall economic growth, which slowed to a modest annual rate of 2.1 percent in the third quarter, saw a significant recovery in the current quarter, as long as the recent increase in COVID cases and concerns about inflation do not dampen holiday shopping.
In a warning note on Wednesday, the University of Michigan reported that its consumer sentiment index fell 4.3 percentage points to a reading of 67.4 this month, the lowest level since November 2011, plagued by concerns about inflation.
And there are regions in the U.S. that are experiencing an increase in COVID-19 cases that could get worse as families travel across the country for the Thanksgiving holiday.
The 5 per cent rise in consumer prices shown in Wednesday’s report has continued a series of high readings over the past few months as demand exceeds supply, partly reflecting shortages due to disturbed supply chains.
President Joe Biden on Tuesday acted to counter rising gasoline prices by ordering a release of the country’s strategic petroleum reserve, but economists expected the move would have only a minimal effect on the rise in gasoline prices.
The data released Wednesday, including a look at what Americans pay for everyday goods, is preferred by the Federal Reserve because it tracks changes in what people buy, as opposed to the consumer price index, which measures a fixed basket of goods.
The Fed seeks to implement its interest rate policy to achieve annual gains in its preferred price index of around 2 percent. Over the past two decades, however, inflation has still failed to reach the Fed’s 2 percent inflation target.
During their November meeting, Fed officials announced the start of a $ 120 billion-a-month reduction in bond purchases the central bank has made to put downward pressure on long-term interest rates.
It was the Fed’s first maneuver to pull back on the massive support it provided to the economy. Economists expect that this will be followed in the second half of 2022 by an increase in the Fed’s benchmark interest rate, which will affect millions of consumer and business loans. The rate has been at a record low of 0 percent to 0.25 percent since the pandemic hit in 2020.
And if inflation continues to exceed the Fed’s target, which Fed Chairman Jerome Powell described for months as transient, economists will increase the chances of an accelerated reduction in the Fed’s monthly bond purchases, as well as earlier action over its first interest rate hikes.
The Wednesday report on spending and revenue 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 increased by 1.6 percent. Expenditure on services increased by 0.9 per cent in October.
With spending more than income, the personal savings rate dropped to 7.3 percent in October, from 8.2 percent in September, but still a high level.