The Commerce Department announced Friday that consumers spent less in December, despite an inflation indicator considered important by the Federal Reserve showing a slowing in the pace of price increases.
Personal consumption expenditures excluding food and energy rose 4.4% year on year, down from 4.7% in November and in line with the Dow Jones forecast.
Consumer Spending Declines
This was the smallest yearly growth rate since October 2021. On a monthly basis, so-called core PCE climbed 0.3%, matching expectations.
Simultaneously, consumer spending was significantly lower than previously estimated, showing that the economy weakened at the end of 2022 and leading to fears of a 2023 recession.
Spending adjusted for inflation fell 0.2% month on month, worse than the 0.1% dip predicted by Wall Street.
Personal income rose 0.2% month on month, as expected. The figures are being released as Fed officials assess the impact of their rate hikes on the economy.
In accordance with other recent economic indicators, they show inflation persisting but at a lesser rate than the one that drove price increases to their greatest pace in more than 40 years in mid-2022.
However, the data also shows that consumer spending, which accounts for more than two-thirds of all economic activity in the United States, is declining. Real consumer spending fell 0.3% when adjusted for inflation.
Feds Seek To Minimize Supply-Demand Imbalances
“Even if real consumption returns to growth over the first few months of this year, the disastrous end to the previous quarter means that first-quarter real consumption growth will be close to zero,” stated Paul Ashworth, Capital Economics’ top North American economist. Ashworth now forecasts 1.5% annualized GDP growth in the first quarter.
The Fed regularly monitors core PCE because it compensates for changing consumer behavior, such as swapping lower-priced goods for higher-priced items and excludes volatile food and energy costs.
The Fed officially states that it monitors the headline number. However, officials have often stated that core PCE is a stronger long-term measure of inflation since it excludes prices that can be volatile over shorter time periods.
The Fed is then likely to take a break to assess the impact of the string of aggressive hikes on the economy. Officials seek to temper a smoldering labor market and minimize supply-demand imbalances that have caused inflation to soar.
Core Inflation
For the second month in a row, monthly inflation increased by only 0.1% from November to December. Energy costs declined 5.1%, as did the overall cost of goods.
Core prices, which exclude volatile food and energy costs, increased 0.3% between November and December and 4.4% year on year. The year-over-year percentage fell from 4.7% in November but remained significantly above the Fed’s 2% target.
The Fed has been attempting to curb the nation’s spending, growth, and rising prices for nearly two years. Its benchmark rate, which affects many consumer and corporate loans, is currently in the 4.25% to 4.5% level, up from virtually zero in March.
Although the inflation has slowed, most economists believe the Fed’s harsh medication will send the economy into a recession this year.
The Fed is in an increasingly perilous situation. Chair Jerome Powell has stated that the central bank intends to keep raising its benchmark interest rate and keeping it elevated, maybe until the end of the year. However, if a severe recession occurs, this program may become unsustainable.
The government announced on Thursday that the economy grew at a respectable rate in the final three months of last year, but that much of the growth was driven by one-time factors: businesses refilled their depleted inventories as supply chain snarls loosened, and the nation’s trade deficit reduced.
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