The Federal Reserve's preferred inflation measures eased in November while consumer spending stagnated, suggesting the central bank's interest rate increases are helping cool persistent price pressures and broader demand.
The personal consumption expenditures price index, excluding food and energy -- which Fed Chair Jerome Powell has stressed is a more accurate inflation measure -- rose 0.2% in November from a month earlier, Commerce Department data showed Friday.
In the 12 months through November, that so-called core gauge was up 4.7%, a step down from a 5% annual gain in October. Including food and energy, the overall index increased 0.1% on a month-to-month basis and was up 5.5% annually in November, the lowest since October 2021.
Personal spending, adjusted for inflation, stalled in November. An increase in services spending, led by restaurants and accommodation, offset a decline in spending on merchandise.
New vehicles were the leading contributor of that decrease.
Like consumer price index data released earlier this month, the report Friday points to a welcome retreat in price pressures and suggest the U.S. has passed peak inflation. While many expect a rapid pullback in inflation over the next year, the Fed is ultimately aiming for a 2% goal.
Powell emphasized that last week when he said the central bank needs "substantially more evidence" to have confidence that inflation is on a sustained downward path.
Looking ahead, the central bank is expected to continue raising interest rates into next year -- to a higher level than many investors had expected -- and remain restrictive for some time. As for the size of any February rate increase, Powell said the decision will be based on incoming data, such as Friday's figures and others for December, released next month.
"It seems reasonable to expect people to become more cautious, now that they have run down about half of their accumulated pandemic savings, and labor market conditions are softening," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note.
While he sees consumption expanding at a robust pace in the current quarter, "we would be amazed if that pace is repeated in the first quarter of next year," Shepherdson said.
The median estimates in a Bloomberg survey of economists called for a 0.2% advance in the core personal consumption expenditures price index and a 0.1% gain in inflation-adjusted spending. U.S. stock futures fluctuated in early trading while Treasury yields bounced higher.
The report Friday indicated consumers lost momentum last month amid higher interest rates and elevated inflation. While the strength of the jobs market and rising wages have bolstered household spending, Americans are tapping into savings and leaning more on credit cards, raising the question of whether consumers will be able to continue to drive economic growth through 2023.
The saving rate ticked up to 2.4% in November, the first increase since July but among the lowest readings on record, the Commerce Department report showed.
Inflation-adjusted outlays for merchandise dropped 0.6%, the worst since February, while spending on services rose 0.3%.
Many economists expect the U.S. to fall into recession within the next year, but the outlook remains highly uncertain. That said, economic activity has generally accelerated in the second half of the year. Data Thursday showed gross domestic product rose an annualized 3.2% in the third quarter, slightly higher than previously estimated.
Rising wages and lower gas prices gave many Americans the wherewithal to keep spending in November. Inflation-adjusted disposable income rose 0.3%. Wages and salaries, unadjusted for prices, were up 0.5% for a second month.
Sustained wage gains, particularly in service sectors, is expected to keep inflation persistently higher than the Fed's goal for some time, underscoring the importance of the labor market to Fed policymaking in the months ahead.
Generally, economists expect the personal consumption expenditures price index to decelerate slower than the Labor Department's consumer price index, which is viewed more as an initial monthly inflation measure. By the end of next year, Fed officials anticipate core personal consumption expenditures price index inflation to be around 3.5%.
In addition to the softer consumer spending figures, a separate report showed more moderate demand for business equipment. Orders placed with U.S. manufacturers for nondefense capital goods excluding aircraft rose 0.2% in November after a sharp downward revision to the prior month, according to Commerce Department. Total bookings for durable goods sank 2.1%, the most since April 2020. The data isn't adjusted for inflation.
Information for this report was contributed by Matthew Boesler and Chris Middleton of Bloomberg News (WPNS).