U.S. households cut spending in December, adding to signs of an economic slowdown, as underlying inflation cooled its slowest pace since October 2021.
Spending by U.S. households decreased 0.2% in December from the prior month, the Commerce Department said Friday, compared with a downwardly revised 0.1% decrease in November. Households cut spending on goods last month and increased spending slightly on services.
The personal-consumption expenditures price index—the Federal Reserve’s preferred gauge of inflation—rose 5% in December from a year earlier, after increasing 5.5% in November.
The core PCE-price index, which captures underlying inflation after removing volatile food and energy prices, rose 4.4% in December from a year earlier—its slowest pace since October 2021. That compared with 4.7% in November. The central bank aims for 2% annual inflation.
On a month-to-month basis, the PCE-price index rose 0.1% in December from the prior month, matching November’s increase. Core prices rose 0.3% in December from the prior month, up from November’s 0.2% increase.
The personal saving rate increased to 3.4% in December from 2.9% in November.
The economy has shown signs of cooling in response to the Fed’s efforts to combat inflation. In the past year, the central bank reeled off the most rapid series of rate increases since the early 1980s, raising its federal-funds rate by 4.25 percentage points.
Efraim Benmelech, a professor of finance at Northwestern University, said those higher interest rates are making mortgages more expensive and leading to fewer home sales. That leads to less spending on appliances, paint and other home goods, because people commonly buy those items ahead of a sale and after moving.
“The actions of the Fed are leading to lower consumption,” he said.
The Fed is set to deliberate on the benchmark interest rate at its meeting next week. Officials have signaled that a quarter-point increase is likely. That would mark a slower pace of interest-rate increases compared with last year.
The labor market remains tight, with unemployment at 3.5%, matching a half-century low. Meanwhile, the pace of hiring has slowed, and several large companies have announced layoffs. Those job cuts have spread beyond interest rate sensitive technology and finance sectors and into manufacturing and media.
Recent data indicates consumers have shifted their spending back into services, which includes rent, dining out and travel, after a big increase in goods purchases earlier in the pandemic.
That increase in demand is being met with higher prices as service providers are raising wages and facing rising costs for supplies.
Adam Halberg, chief executive of Barcelona Wine Bar, said his 19 tapas restaurants across the country have changed menu items to reduce use of ingredients that have risen in price. He said he had a strong holiday season compared with previous year, when the Omicron variant led to lots of last-minute cancellations.
“It’s not revenge dining or revenge travel,” he said. “Going out to a great restaurant or a great bar is just back in a normal cadence of life for people.”
Jayne Navarre of Portsmouth, Va., has been carefully choosing where she spends because prices have risen for almost everything she buys. The law-firm marketer said she and her daughter recently went to a local restaurant for lunch and spent nearly $50 for the two of them, which was a significant increase from before.
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“I was wondering if my glasses were foggy. Is that really a 4?” she said. “It’s the same food. It’s just more expensive.”
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