Consumer Spending Cooled in November as Closely Watched Inflation Gauge Slowed

The Federal Reserve’s preferred inflation measure is showing signs of moderating after months of rapid price increases, and a closely watched gauge of consumer spending slowed last month, a sign that the economy may have less steam as it heads into 2023.

The Personal Consumption Expenditures price index climbed 5.5 percent in November from a year earlier, a slowdown from 6.1 percent in the previous reading. After stripping out food and fuel, which jump around, a so-called core price measure climbed 4.7 percent, down from 5 percent in the previous reading. Both figures were roughly in line with economist forecasts.

Although inflation is slowing, it still has a long way to go to return to a more normal pace. The Fed raised interest rates at the fastest pace in decades in 2022 to try to slow down consumer and business demand, hoping to force price increases to moderate. Those rate increases are now trickling through the economy, slowing the housing market, cooling demand for new business investments and potentially weakening the labor market.

But it remains to be seen just how much the Fed’s policy changes will slow down the overall economy. So far, spending and hiring have both been relatively resilient — which puts new consumption data into focus.

“Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor market conditions,” Jerome H. Powell, the Fed chair, said at his final news conference of the year.

The economic report released on Friday showed that consumer spending slowed in November, climbing just 0.1 percent from October, less than the 0.2 percent economists had forecast. But spending in October was revised up slightly, and posted a robust 0.9 percent increase — evidence that it is still hard to get a handle on the trajectory for consumption. Those figures are not adjusted for inflation.

Still, early signs of cooling consumer demand are likely to be welcome news in Washington. The economy slowed notably in 2022 compared with its rapid pace of expansion in 2021, but policymakers at the Fed believe that it needs to remain slower than usual through next year to get inflation back down to the 2 percent target that they shoot for on average over time.

That’s because rapid inflation — which was originally set off as supply shortages induced by the pandemic collided with strong consumer demand — has become more stubborn over time. It now spans a variety of service categories, from dentist visits to meals out at restaurants. Those sorts of price gains tend to be fueled by increasing wages, and can take time to stamp out.

That is why the Fed is trying to slow the economy, bringing demand for workers back into balance with the supply of available employees. As conditions moderate, policymakers think, pay gains will slow and inflation will be able to return fully to normal, paving the way for more sustainable growth in the future.

But nailing that landing is sure to be difficult. Officials will have to guess just how high interest rates need to go — and how long they need to stay there — to slow the economy and price increases sufficiently. That is an inexact science, and there is a risk that officials will cause a painful recession as they try to slow down the economy.

As a result, Fed officials this month began to move rates at a more gradual pace, and have hinted that they could stop raising them altogether at some point in 2023. That will give them time to see how their policy changes so far are playing through the economy.

“It’s now not so important how fast we go. It’s far more important to think what is the ultimate level?” Mr. Powell said at his latest news conference. “And then it’s — at a certain point, the question will become how long do we remain restrictive?”


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