US Consumer Spending Remains Strong as Inflation Moderates

US consumer spending increased in November, signaling continued strength in the economy despite rising interest rates, reports Reuters. This resilience comes as the Federal Reserve this week projected fewer interest rate cuts in 2025 than previously anticipated.

The Commerce Department reported Friday that consumer spending rose 0.4% last month, following a revised 0.3% increase in October. The broad-based spending increase was led by new motor vehicles, likely driven by post-hurricane replacement demand, and followed by increases in recreational goods and vehicles, financial services, and various other categories, including healthcare, clothing, footwear, furniture, housing, and utilities.

"The economy continues to grow from strong consumer demand as income growth and the wealth effect from higher portfolio values give consumers capacity to spend," said Jeffrey Roach, chief economist at LPL Financial, to Reuters. "Inflation was more benign than expected but the stickiness of some categories supports the Fed's hesitancy to materially lower rates next year."

Inflation also showed signs of moderation last month. The personal consumption expenditures (PCE) price index rose 0.1%, the smallest increase in six months, after a 0.2% gain in October. While this indicates potential cooling in price pressures, the annual increase in core inflation, excluding food and energy, remains well above the Fed's 2% target.

"The general disinflation trend, in view of the much higher U.S. dollar, is intact for the next two months," said Brian Bethune, an economics professor at Boston College, to Reuters. "However, if the incoming administration raises tariffs significantly, that will provoke retaliation and usher in a period of stagflation that will rival the stagflation of the 1970s."

The Fed, recognizing the economy's continued resilience and persistent inflation, cut its benchmark interest rate by 25 basis points to the 4.25%-4.50% range this week, but now forecasts only two rate reductions in 2025, down from four projected in September. This revised outlook also reflects uncertainty surrounding the policies of the incoming Trump administration.

The robust labor market, characterized by low unemployment and strong wage growth, continues to support consumer spending. Economists caution, however, that these benefits are primarily accruing to middle- and higher-income households, with lower-income consumers facing financial constraints.

Personal income rose 0.3% in November, driven by a 0.6% increase in wages. Despite this, the savings rate dipped to 4.4% from 4.5% in October, suggesting some households are tapping into savings to fund purchases.

The moderation in inflation last month is unlikely to significantly alter the Fed's overall message. The core PCE price index, the Fed's preferred inflation gauge, rose 0.1% in November, the smallest increase since May. In the year through November, core PCE inflation stood at 2.8%, unchanged from October.