Stubborn and sticky inflation did not prevent the American consumer from tapping rising real incomes in November as the economy approached the traditional holiday season.
Personal income increased by 0.3%, personal spending by 0.4% and real spending by 0.3% as households used the 1.1% increase in personal disposable income during the third quarter following 18 straight months of income gains above inflation.
This all occurred as the top-line and core PCE price indices increased by 0.1% on the month, and by 2.5% and 2.9% on an annual basis, respectively.
The personal consumption expenditures price index, which is the Fed’s preferred measure of inflation, is advancing at a 2.6% three-month average annualized pace, a sign that the decline in inflation has moderated.
Now, with the Fed acknowledging that it will not reach its 2% inflation target until 2027, the easing bias at the central bank looks as if it will be pulled back next year.
It is looking increasingly likely that the U.S. economy accelerated in the current quarter. Absent a string of disappointing data in December, there is a growing possibility that growth in the final three months of the year will arrive above the third quarter’s robust 3.1% rate.
Such an increase would create additional concerns about an acceleration in inflation because of robust aggregate demand.
Given the fact that we are almost certain to see an increase in service prices and rents at the turn of the year, expect more cautious language from the Fed.
The data
Personal income advanced at a 5.7% pace from a year ago while personal spending increased by 5.5% with real spending rising by 2.9%.
Wages and salaries jumped by 0.6% on the month and by 5.8% annually. These gains will support robust spending and economic growth in the final quarter.
Disposable income advanced by 0.3% on the month and by 5.1% from a year ago. Personal spending rose by 5.7% on a three-month average annualized pace, which once adjusted for inflation was up by 3.6%.
Personal income excluding government transfers climbed by 0.2% as did disposable income. Disposable income increased by 2.6% over the past year.
The savings rate stood at 4.4%.
The inflation data, which arrived at 2.44%—a near miss on a 2.5% reading—continued to illustrate disinflation in the goods sector. Goods prices declined by 0.4% from a year ago, durables dropped by 1.1% and non-durables were flat over the past year.
While service prices advanced by 3.8% from a year ago, stubborn service sector prices are one of the major sources of overall inflation.
Food prices increased by 1.4% while energy costs dropped by 4%.
The takeaway
The U.S. economy continues to generate sufficient income to support the robust pace of spending that has characterized the past year.
The November income and spending data strongly implies a strong close to the holiday shopping season and an above 3% pace of growth in the American economy.
Read more of RSM’s insights on the economy and the middle market.
But with the underlying pace of inflation at or near 2.6%, the easing bias of the Federal Reserve is in the process of recalibration.
Forward-looking firms should plan on a policy rate closer to 4% on average next year with longer-term rates rising to at or above 4.5% on average with risk of a move to or above 5%.
The regime changes in the American economy featuring the end of low interest rates, the adoption of policy aimed at bolstering vital national industries and an influx of foreign capital have pushed the economy into a new era of faster growth, lower unemployment and higher inflation.
