Robust spending, increasing income and the re-establishment of price stability amid strong productivity gains are the primary factors shaping the economic narrative.
American households are well positioned to keep spending at a 3% to 3.5% pace as inflation moves back to 2%.
American households are well positioned to keep spending at a 3% to 3.5% pace as inflation moves back to 2% and real wages continue to increase.
The fundamental strength of both the labor market and wage gains will add to the conversation that the current path of monetary policy may need to slow because of an economy that continues to generate above-trend growth.
While we continue to expect the Federal Reserve to reduce its policy rate by 25 basis points at each of its November and December meetings, talk will intensify around a December pause on the back of that 3.7% pace of real spending in the gross domestic product data and the September income and spending data.
In September, personal spending increased by 0.5%, real spending advanced by 0.4% on the back of 0.3% personal income gains, and the personal consumption expenditures price index advanced by 0.2% (or, more precisely, 0.175%) on the month and by 2.1% (2.095%) on a year-ago basis. Core PCE increased by 0.3% on the month and by 2.7% annually.
Once one analyzes the data, the increase in inflation is all in the service sector, which showed a 3.7% increase with goods prices falling by 1.2%, durables dropping by 1.9% and nondurables falling by 0.8%. Food prices increased by 1.2% while energy prices dropped by 8.1%.
Personal spending on a three-month average annualized basis increased at a 5.2% pace while the savings rate eased to 4.6% from 4.8%.
On an inflation-adjusted basis, personal spending increased by 3.7% at a three-month average annualized pace while disposable income increased by 0.1% on the month and personal income excluding government transfers advanced at that same pace.
Employment cost index
In a separate report, the employment cost index continued to ease in the third quarter with overall compensation, wages and salaries, and benefits all increasing by 0.8% while private industry had a 0.7% increase in compensation and benefits.
Wages and salaries advanced by 0.8%. Government compensation increased by 1.1%, wages and salaries by 1% and benefits by 1.2%.
On a year-over-year unadjusted basis, overall compensation increased by 3.9% and private industry compensation rose by 3.6%. This is in line with the preferences of Federal Reserve policymakers, who prefer a growth path in private industry compensation of 3% to 3.5%.
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