(Reuters) – U.S. consumer spending rose modestly in October, while the annual increase in inflation was the lowest since the start of 2021, signs of slowing demand that could further strengthen expectations that the Federal Reserve will raise interest rates. The campaign is over.
The Commerce Department’s Bureau of Economic Analysis said Thursday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2% last month after an unchanged 0.7% gain in September. Economists polled by Reuters had expected a 0.2% increase in spending.
Consumer spending slowed after a strong growth pace in the third quarter and reflects the impact of higher borrowing costs and lower excess savings among lower-income households. Although wages remain high, the pace of growth has slowed since the beginning of the year due to a softening labor market.
Millions of Americans resumed paying off student loans last month, which could lead to a reduction in spending next year.
Due to fears that the economy could slip into recession as early as 2024, households may be reluctant to spend and instead increase their savings. So far, the economy has defied recession predictions, growing at an annual pace of 5.2% in the third quarter, the fastest in nearly two years.
Growth projections for the fourth quarter are mostly below the 2% rate. Most economists expect the economy to enter a period of very slow growth, and avoid a full-scale recession.
Inflation, as measured by the personal consumption expenditures (PCE) price index, was unchanged in October after climbing 0.4% in September.
In the 12 months to October, the PCE price index rose 3.0%. This was the smallest year-on-year gain since March 2021 and followed a 3.4% gain in September.
Excluding volatile food and energy components, the PCE price index rose 0.2% last month after rising 0.3% in September. According to economists, a monthly inflation reading of 0.2% is needed on a sustainable basis to bring inflation back to the US central bank’s 2% target.
The so-called core PCE price index rose 3.5% on a year-on-year basis in October after rising 3.7% in September.
The Fed tracks the PCE price index for monetary policy.
Weak demand and inflationary pressures have raised optimism that the Fed might raise interest rates this cycle, with financial markets even expecting a rate cut in mid-2024. From March 2022, the central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.
The easy labor market conditions were reinforced by a separate report from the Labor Department on Thursday, which showed that initial claims for state unemployment benefits rose by 7,000 to a seasonally adjusted 218,000 for the week ending Nov. 25. Economists had estimated 226,000 claims for the latest week.
Last week’s claims data also included the Thanksgiving holiday. Claims are volatile around holidays. Nevertheless, the labor market is cooling along with overall demand in the economy.
The claims report shows that the number of people receiving benefits, after the initial week of aid, rose by 86,000 to 1.927 million during the week ending November 18. So-called continuing claims resumed their upward trend, which began in mid-September, after a brief interruption last week.
The combination of loose labor market conditions and difficulties in adjusting the data for seasonal fluctuations has pushed continued claims even higher following an unprecedented surge in applications for jobless benefits at the start of the COVID-19 pandemic.
(Reporting by Lucia Mutikani, editing by Chizu Nomiyama)