U.S. Inflation Eases, Boosting Household Spending And Economic Outlook

Summary

The U.S. Commerce Department latest report is pointing to easing inflation pressures and bolstering household income, supporting consumer spending and economic expansion as we approach the end of the year. Continuous economic expansion, bolstered by a resilient labor market, has successfully defied pessimistic predictions which date back to late 2022. Inflation, as indicated by the Personal Consumption Expenditures (PCE) price index, fell by 0.1% last month, marking the first decrease in this index since April 2020. This slight fall in inflation coupled with rising wages bodes well for U.S. financial markets, with a four-month high in consumer sentiment recorded in December.

The U.S. Commerce Department’s report on Friday indicated a continued decline in inevitable inflation pressures. This deceleration in inflation increased the disposable income of households, supporting consumer expenditure and the broader economy as we transition into the new year.

Furthermore, the impressive resilience of the labor market contributed to the durability of this economic expansion. These ongoing economic advancements have managed to overturn economists’ and business executives’ pessimistic recession forecasts from late 2022 onwards.

Senior Economist at BMO Capital Markets in Toronto, Sal Guatieri, congratulated (Fed) Chair (Jerome) Powell on these economic improvements. Guatieri believes, given the current favorable economic outcomes, that it’s only a matter of time before the Fed starts to reduce rates.

The Commerce Department’s Bureau of Economic Analysis highlighted that the PCE Price Index dropped by 0.1% last month. This fall represents the first reduction in this index since April 2020. While food prices experienced a slight 0.1% decline, energy prices fell by a more significant 2.7%. Over the past twelve months, up to November, the PCE Price Index rose by 2.6% compared to October’s 2.9% increase.

Consumer Spending Rises

Apart from the volatile food and energy components, the PCE Price Index rose by 0.1% in November, which matches the increase recorded in October. As a consequence of these changes, the critical PCE Price Index increased by 3.2% year-on-year, showing the smallest rise since April 2021 – following a 3.4% surge in October. The government-reported core PCE inflation increased at a steady annualized rate of 2.0% in the third quarter.

With the labor market still firm, wage levels jumped by 0.6% last month, effectively counteracting the impact on personal income due to a decrease in government support, like food stamps and Medicaid. In addition, the U.S. Central Bank maintained steady rates last week, indicating that it’s likely that lower borrowing costs will arrive in 2024.

Following the increase of income after inflation and tax adjustments, American households were able to increase their spending at the start of the holiday shopping season. Consumer expenditure, which forms more than two-thirds of U.S. economic activity, experienced a 0.2% uptick last month after a 0.1% increase in October.

Orders for durable goods witnessed a 5.4% surge in November, effectively recovering from October’s 5.1% decline. Despite a 12.2% drop in new home sales to a one-year low, industry experts predict this decline will be short-lived due to a scarcity of previously owned houses on the market along with a decrease in mortgage rates.

As the U.S. economy heads into 2024, Chief Economist at PNC Financial (NYSE:) in Pittsburgh, Gus Faucher, remains optimistic about the likelihood of avoiding a recession in 2024.

For Forex or CFD traders, this steady U.S. economic expansion, with the potential for rate cuts, could provide trading opportunities on USD paired currencies and affect projections for economic growth in 2024.

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