Growth in US consumer spending exceeds expectations; inflation rate decreases | So Good News

WASHINGTON, Oct 28 (Reuters) – U.S. consumer spending rose more than expected in September as inflationary pressures continued, prompting the Federal Reserve to raise interest rates by three quarters next week.

But there was encouraging news in the fight against inflation, with some from the Labor Department on Friday showing private sector wage growth slowed sharply in the third quarter. The corrections were made in industries that are most affected by inflation such as retail, construction and finance. Sectors such as health care and education, which are still facing labor shortages, have been hit hard.

“Americans may say they’re worried about inflation, but they’ve been buying, which keeps the economy growing for another quarter,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “There is no chance that inflationary pressures will ease soon from the reduction in demand.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6% last month, the Commerce Department said. August data was also revised to show a 0.6% rise in income instead of 0.4% as forecast.

Economists polled by Reuters had forecast consumer spending to gain 0.4%. Consumers increased car purchases and spent more on food, clothing, prescription drugs and entertainment. Consumer spending also rose 0.3% after two monthly declines.

Contributions to services also rose, led by housing and utilities as well as travel and dining. Employment rose 0.8%.

The data was included in Thursday’s third-quarter gross domestic product report, which showed economic growth after a contraction in the first half.

Annual growth of 2.6% last quarter was driven by a sharp decline in trade, with domestic demand expected to be the softest in two years.

Growth in consumer spending slowed to 1.4% from the April-June pace of 2.0%. Data for September, however, showed that interest rates rose at the end of the quarter, suggesting they could be used in the final three months of 2022.

The Fed raised its interest rate overnight from near zero in March to 3.00% to 3.25%, the fastest rate hike in a generation or more. The strengthening has included three straight 75-basis-point runs.

Strong demand in the last quarter left economists hoping that the US central bank could signal at its Nov. meeting. 1-2 that it will provide small increases in December and early next year, although more will depend on inflation. A survey from the University of Michigan on Friday showed that expectations of a near-five-year rate of inflation among consumers increased this month from September.

Stocks on Wall Street rose. The dollar gained against a basket of currencies. US Treasury yields fell.

INFLATION IS RISING

The Commerce Department’s report showed that consumer spending (PCE) rose 0.3%, which is in line with August’s gain. In the 12 months to September, the PCE price index increased 6.2%, after rising by the same margin in August.

Excluding perishable food and energy sectors, the PCE price index rose 0.5%, similar to the increase in August. The so-called core PCE price index advanced 5.1% year-on-year in September after an increase of 4.9% in the 12 months to August.

The Fed targets the PCE rate at its 2% inflation target. Some measures of inflation are doing very well. The number of buyers increased 8.2% year-on-year in September.

But there is some hope. In a separate report on Friday, the Labor Department said the Employment Cost Index, a measure of labor costs, rose 1.2% last quarter after increasing 1.3% in April-June.

ECI is widely regarded by policy makers and economists as one of the better methods of predicting labor market volatility and inflation because it adjusts the structure and dynamics of employment. They are being monitored to ensure that wage growth has peaked.

Operating income rose 5.0% year over year after advancing 5.1% in the second quarter.

Wages and salaries rose 1.3% after rising 1.4% in the second quarter. They were up 5.1% year-on-year after rising 5.3% in the previous quarter.

Also encouraging, corporate earnings rose 1.2% after rising 1.6% in the second quarter. This lowered the annual growth rate of private sector wages to 5.2% from 5.7% in the second quarter.

That’s in line with recent data showing lower wages, including average hourly wages in the Labor Department’s monthly report and the Atlanta Fed’s wage tracker. Although the Fed’s “Beige Book” report last week showed that “wage growth was not widespread” in early October, he said that “reductions were reported in several areas.”

“Inflationary challenges stemming from the labor market may be coming, but it will take time for the Fed to warm enough,” said Sarah House, chief economist at Wells Fargo in Charlotte, North Carolina.

State and local wages rose 2.1% after rising 0.7% in the second quarter, partly due to an increase in teacher pay at the start of the school year.

Profits rose 1.0% after a 1.2% increase in the April-June quarter. They were up 4.9% year-on-year.

Although inflation is eroding consumer spending power, consumer spending gained for another month in September, leading to a strong fourth-quarter inflation. Consumer spending rose 0.3% last month, matching August’s increase.

The recession is supported by strong wage growth, which boosts income. Families are also using their money to sell. Personal income rose 0.4% last month, matching the gain in August. The saving rate fell to 3.1% from 3.4% in August.

“It appears that consumers are spending more efficiently in the fourth quarter, with recent gains being supported by the decline in ‘oversavings’ that households made prior to the pandemic,” said Daniel Silver, chief economist at JPMorgan. New York.

Reporting by Lucia Mutikani Editing by Nick Zieminski and Paul Simao

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