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 has raised interest rates at the fastest clip in decades this year as it tries to temper 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 has left policymakers and economists alike closely watching each new data report, like the one released Friday, for any hint at how consumers are faring.

“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 figures 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 do not account for inflation. After adjusting for price increases, spending did not grow at all.

And under the surface, the data pointed to a continued shift in what Americans are buying: Spending on services continues to grow, even as people buy fewer goods, like furniture and clothing.

Even if they are not yet conclusive, signs of cooling consumer demand are likely to be welcome news for officials at the Fed. 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 weaker 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 began as pandemic-induced supply shortages 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.

“The low-hanging fruit is working out: Energy components and supply chain issues are coming off,” Priya Misra, head of global rates strategy at T.D. Securities, said of the recent cooling in inflation. But services inflation, she said, is likely to be a more intractable problem.

“They still talk about inflation as public enemy No. 1, but the narrative around inflation has moved to wages and the labor market,” Ms. Misra said.

The Fed is hoping that weighing down the broader economy will help to bring 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.

“Looking ahead, we expect a deceleration in household spending as the Fed hikes rates further in 2023,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in response to the data released on Friday.

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?’”

Among other challenges, it is tough to guess how American consumers, who drive about 70 percent of the economy, will behave next year. They are eking out income gains even counting for inflation in recent months, and they are still sitting on savings amassed during the pandemic. That could help to keep them shopping into 2023.

But at the same time, many families have been drawing down their extra funds and the nation’s savings rate — how much people tuck away out of their disposable income — has dipped to low levels. It is unclear how long people will be willing to spend out of their nest eggs before they begin to meaningfully pull back.

The White House, for its part, has been welcoming any sign that the economy remains resilient at price increases fade.

“There will be more ups and downs in the year ahead, but we are making progress building an economy from the bottom up and the middle out,” President Biden said in a release following the report on Friday. “I’m optimistic for the year ahead.”

But as the Fed’s policy changes play out, many economists expect that the economy will lose momentum and eventually contract next year.

Analysts at Capital Economics “continue to expect a mild recession next year,” Andrew Hunter, the firm’s senior U.S. economist, wrote in a research note on Friday. He noted that consumption is pulling back and business investment is likely to “weaken more markedly next year as the full impact of the Fed’s aggressive tightening this year feeds through.”