WASHINGTON (AP) – The Federal Reserve’s (Fed) preferred inflation gauge eased further in December, and consumer spending fell – the latest evidence that the Fed’s series of interest rate hikes are slowing the economy.
Friday’s report from the Commerce Department showed that prices rose five per cent last month from a year earlier, down from a 5.5 per cent year-over-year increase in November. It was the third straight drop.
Consumer spending fell 0.2 per cent from November to December and was revised lower to show a drop of 0.1 per cent from October to November. Last year’s holiday sales were sluggish for many retailers, and the overall spending figures for the final two months of 2022 were the weakest in two years.
The pullback in consumer spending will likely be welcomed by Fed officials, who are seeking to cool the economy by making lending increasingly expensive.
A slower pace of spending could boost their confidence that inflation is steadily easing.
Still, the decline in year-over-year inflation matches the Fed’s outlook and isn’t likely to alter expectations that it will raise its key rate by a quarter-point next week.
On a monthly basis, inflation ticked up just 0.1 per cent from November to December for a second straight month. Energy prices plunged 5.1 per cent, and the overall cost of goods also fell.
“Core” prices, which exclude volatile food and energy costs, rose 0.3 per cent from November to December and 4.4 per cent from a year earlier. The year-over-year figure was down from 4.7 per cent in November, though still well above the Fed’s two per cent target.
Falling prices for oil, gas, copper, lumber, wheat and other commodities, along with the unclogging of supply chains, have helped slow the retail costs of cars, furniture and clothes, among other items.
Price increases, though, have remained persistently high for some goods and services, including eggs, which skyrocketed 60 per cent last month compared with a year ago.
Egg prices rose 11.1 per cent just in December, inflated by an outbreak of avian flu that has led to a culling of herds and higher feed costs.
Car rental prices have also soared nearly 27 per cent from a year ago and rose 1.6 per cent just in December. But for many other items, inflation is easing.
Coffee prices, though up nearly 14 per cent in the past year, rose just 0.2 per cent last month. And the cost of clothes and shoes rose just three per cent in the past year and 0.3 per cent last month.
Friday’s figures are separate from the better-known inflation data that comes from the consumer price index. The CPI, which was released earlier this month, has also shown a steady deceleration.
“The latest data offer the first tangible signs that the economy’s main engine is slowing,” said lead United States (US) economist at Oxford Economics Oren Klachkin, referring to consumers, whose spending accounts for about 70 per cent of economic activity.
The Fed has been seeking to slow spending, growth and the surging prices that have bedevilled the nation for nearly two years.
Its key rate, which affects many consumer and business loans, is now in a range of 4.25 per cent to 4.5 per cent, up from near zero last March. Though inflation has been decelerating, most economists said they think the Fed’s harsh medicine will tip the economy into a recession sometime this year.
“We continue to see the US economy experiencing a mild recession this year,” said EY Parthenon Senior Economist Lydia Boussour.
A recession typically causes widespread layoffs and higher unemployment. But for now, US employers are adding workers, and the unemployment rate remains at a half-century low of 3.5 per cent.
Should job losses – which are occurring at many finance and tech companies – drive up unemployment, a recession could eventually be declared by a group of economists at the National Bureau of Economic Research (NBER), a non-profit that officially determines when recessions occur.
The economists at the NBER typically make such an announcement well after a recession has actually begun.
For now, the number of people seeking unemployment benefits – a proxy for layoffs – declined last week to 186,000, a very low level historically. And Walmart, the nation’s largest employer, said it would raise its minimum wage, from USD12 to USD14 an hour, to help it keep and attract workers.
The Fed is in an increasingly delicate position.
Chair Jerome Powell has emphasised that the central bank plans to keep boosting its key rate and to keep it elevated, potentially until the end of the year. Yet that policy may become untenable if a sharp recession takes hold.
On Thursday, the government reported that the economy grew at a healthy clip in the final three months of last year but with much of the expansion driven by one-time factors: Companies restocked their depleted inventories as supply chain snarls unravelled, and the nation’s trade deficit shrank.
By contrast, consumer spending in the October-December quarter as a whole weakened from the previous quarter, and business investment dropped off sharply.
Overall, the economy expanded at a 2.9 per cent annual rate in the October-December quarter, down slightly from a 3.2 per cent pace in the previous quarter.
If consumers remain less willing to boost their spending, companies’ profit margins will shrink, and many may cut expenses. That trend could lead eventually to waves of layoffs.
Economists at Bank of America have forecast that the economy will grow slightly in the first three months of this year – but then shrink in the following three quarters.
More frugal consumers would threaten to send the economy into a recession. But they can also help reduce inflation. Companies can’t keep raising prices if Americans won’t pay the higher costs.
Last week, the Fed’s beige book, a gathering of anecdotal reports from businesses around the country, said: “Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.”
