US consumer spending rebounds despite accelerating inflation

United States consumer spending rebounded by a solid 1.3 percent in October despite inflation that during the past year has accelerated faster 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 5 percent compared with the same period last year, the fastest 12-month gain since the same stretch ending in November 1990. The surge in prices this year did contribute to the 1.6 percent rise in spending in November, yet adjusting for inflation, spending was still up a solid 0.7 percent after a 0.3 percent inflation-adjusted gain in September.

Personal incomes, which provide the fuel for future spending increases, rose 0.5 percent in October after having fallen 1 percent in September, a reflection of a drop in government support payments.

Pay for Americans has been on the rise with companies desperate for workers, and government stimulus checks earlier this year further padded their bank accounts. That bodes well for a strong holiday season and major US retailers say they are ready after some companies, like Walmart and Target, went to extreme lengths to make sure that their shelves are full despite widespread shortages.

Analysts said the solid increase in spending in October, the first month in 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, will post a sizable rebound in the current quarter, as long as the recent rise in COVID cases and concerns about inflation do not dampen holiday shopping.

In a cautionary 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, its lowest level since November 2011, weighed down by inflation concerns.

And there are regions in the US experiencing a surge in COVID-19 cases that could get worse as families travel the country for the Thanksgiving holiday.

The 5 percent rise in consumer prices shown in Wednesday’s report continued a string of high readings during the past several months as demand outstrips supply, reflecting in part shortages due to snarled supply chains.

President Joe Biden acted Tuesday to counter spiking petrol prices by ordering a release from the nation’s strategic petroleum reserve, but economists expected that move to have only a minimal effect on the surge in petrol prices.

The data released Wednesday, including the peek into what Americans are paying for everyday goods, is preferred by the Federal Reserve because it tracks changes in what people are buying, unlike the consumer price index, which measures a fixed basket of goods.

The Fed seeks to conduct its interest-rate policies to achieve annual gains in its preferred price index of about 2 percent. However, during the past two decades, inflation has perennially failed to reach the Fed’s 2 percent inflation target.

Fed officials at their November meeting announced the start of a reduction in its $120bn per month in bond purchases which the central bank had been making to put downward pressure on long-term interest rates.

That marked the Fed’s first manoeuvre to pull back on the massive support it has been providing to the economy. Economists expected that will be followed in the second half of 2022 by an increase to the Fed’s benchmark interest rate, which influences millions of consumer and business loans. That 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 overshoot the Fed’s target, which Fed Chair Jerome Powell for months has described as transitory, economists the odds increasing for an accelerated reduction in the Fed’s monthly bond purchases, as well as earlier action on its first interest rate increases.

The Wednesday report on spending and incomes showed that consumers boosted their purchases of durable goods, such as cars, by 3.3 percent in October while spending on nondurable goods such as clothing rose by 1.6 percent. Spending on services increased 0.9 percent in October.

With spending up more than incomes, the personal saving rate fell to 7.3 percent in October, down from 8.2 percent in September, but still a high level.