US consumer spending solid; inflation showing progress as year ends

Consumer spending surged at a 3.7% pace in the third quarter, the fastest in 1-1/2 years, helping to propel the economy to a 3.1% growth rate following a 3.0% pace of expansion in the April-June quarter.

The Atlanta Fed is forecasting gross domestic product increasing at a 3.1% rate in the fourth quarter.

Fed Chair Jerome Powell on Wednesday described the economy as having “just been remarkable,” adding “I feel very good about … the performance of the economy and we want to keep that going.” The central bank on Wednesday cut its benchmark overnight interest rate by 25 basis points to the 4.25%-4.50% range. It forecast only two rate reductions in 2025, in a nod to the economy’s continued resilience and still-high inflation.

In September, Fed officials had forecast four quarter-point rate cuts next year. The shallower rate cut path in the latest projections also reflected uncertainty over policies from the incoming Trump administration.

Stocks on Wall Street traded higher. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.

STRONG WAGE GAINS

Labor market stamina, marked by low layoffs and strong wage growth, is underpinning consumer spending. Strong household balance sheets, reflecting high stock market and home prices are also driving spending. Household savings remain supportive.

Economists, however, cautioned that it was mostly middle- and higher-income households that were benefiting from the wage gains and wealth effects, noting that lower-income consumers were under financial pressure.

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Personal income rose 0.3%, with wages shooting up 0.6%. Income at the disposal of households after accounting for inflation rose 0.2%, meaning some tapped their savings to fund purchases. The saving rate dipped to 4.4% from 4.5% in October.

Economists did not believe that the moderation in inflation last month would have changed the tone of the Fed’s message on Wednesday. The personal consumption expenditures (PCE) price index rose 0.1% after an unrevised 0.2% gain in October.

Goods prices were unchanged after three straight monthly decreases. Motor vehicle prices increased 0.7%, but the cost of recreational goods and vehicles fell for the fourth consecutive month. Services prices rose 0.2% after gaining 0.4% in October.

Housing inflation increased at the slowest pace since April 2021, reflecting a moderation in rents. The cost of food and accommodation services rose by the most in 10 months.

In the 12 months through November, the PCE price index advanced 2.4% after rising 2.3% in October.

The increase in the annual inflation rate was partly due to last year’s low readings dropping out of the calculation.

Excluding the volatile food and energy components, the PCE price index climbed 0.1%. That was the smallest rise since May, and followed an unrevised 0.3% gain in October. Core inflation was running at a 2.5% rate in the last three months.

In the 12 months through November, core prices increased 2.8% after advancing by the same margin in October.

The Fed tracks the PCE price measures for monetary policy. It hiked its policy rate by 5.25 percentage points between March 2022 and July 2023.

“The general disinflation trend, in view of the much higher U.S. dollar, is intact for the next two months,” said Brian Bethune, an economics professor at Boston College. “However, if the incoming administration raises tariffs significantly, that will provoke retaliation and usher in a period of stagflation that will rival the stagflation of the 1970s.”

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)