U.S. consumers – the main engine of the U.S. economy – showed little reluctance to spend last month despite the fastest inflation in three decades, preparing the economy for a surge in year-end growth.
Purchases of goods and services, unadjusted for price changes, rose 1.3%, the highest since March, the Commerce Department said on Wednesday. Even after accounting for higher prices, spending has consistently exceeded expectations, a sign that consumers have started holiday shopping early.
The numbers, the main course of a pre-Thanksgiving data feast that included strong commercial equipment orders, increased exports and a rebound in new home sales, help explain why several economists have improved their tracking estimates for fourth quarter economic growth.
The reports further complicate matters for policymakers at the Federal Reserve, who are trying to balance rapid inflation and a job market still 4 million jobs below pre-pandemic levels. Mary Daly, president of the San Francisco Fed Bank, is the latest official to suggest that a faster cut to the central bank’s asset purchase program may be needed.
The personal consumption expenditure price indicator, which the Federal Reserve uses for its inflation target, rose 0.6% from the previous month and 5% from October 2020. After adjusting for inflation higher, spending rose 0.7% as spending on goods and services. picked up.
âThe combination of higher inflation risks and consumer resilience means that the likelihood of the Fed stepping up the pace of reduction has increased significantly,â Bloomberg Economics’ Anna Wong and Eliza Winger wrote following the report.
Economists at JPMorgan Chase & Co. have revised their estimate for tracking fourth-quarter GDP upward to 7% on an annualized basis, from 5% after Wednesday’s data. Morgan Stanley economists raised their current forecast to 8.7% from 3%, while Capital Economics now expects growth of 6.5%.
This does not mean that the economy is without challenges. Strong demand is straining supply chains even more, and inflation has led to a collapse in consumer confidence. In addition, a resumption of COVID-19 cases in recent weeks is likely to restrict activity during the winter.
At the same time, wages and salaries rose 0.8% in October after rising 0.9%, according to the Commerce Department report. A multitude of companies, including Macy’s Inc. and Sherwin-Williams Co., are raising wages and improving benefits in a war for talent.
If wage growth continues at the current rate, “spending may remain scorching even without further government assistance and in the face of rapid inflation,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note.
Personal income rose 0.5% even as government assistance to workers during the pandemic declined further. The savings rate – or personal savings as a proportion of disposable income – fell to 7.3%, more in line with pre-pandemic readings and signaling that Americans have less cushion.
Personal disposable income, or inflation-adjusted after-tax income, fell for a third month, falling 0.3% in October. Spending on inflation-adjusted goods rose 1% last month, while spending on services rose 0.5%, according to the report.
The basic price index, which excludes food and energy, rose 4.1% from a year ago, the highest since 1991. Going forward, inflation is expected to rise further over the next few months, as persistent supply chain challenges and ongoing hiring difficulties push prices up. .
Bloomberg’s Kristy Scheuble, Sophie Caronello and Michael McDonough contributed to this report.