Quiver Quantitative - The US witnessed an acceleration in its core inflation metric, reaching a four-month high in September, further propelled by a boost in consumer spending. The core personal consumption expenditures price index, which omits the unpredictable sectors of food and energy, experienced a 0.3% ascent in September, as reported by the Bureau of Economic Analysis. Moreover, once adjusted for inflation, consumer spending surged by 0.4% in the same month. This robust household demand, combined with the burgeoning inflation, signals a promising commencement to the fourth quarter. While there's anticipation of a deceleration in consumer spending in the upcoming months, Federal Reserve authorities have hinted that encouraging data could potentially instigate further fiscal tightening.
Omair Sharif, President of Inflation Insights, emphasized the urgency for the Federal Reserve to remain vigilant towards possibly escalated core inflation as the year concludes. Notably, certain metrics, such as real consumer spending and the PCE price index, surpassed their respective estimates. Nonetheless, the prevailing expectation is that the benchmark interest rate will maintain its current status in the ensuing Fed meeting. Factors like the unprecedented leap in the 10-year Treasury yields, which recently crossed the 5% threshold for the first time in nearly 16 years, play a pivotal role in the Federal Reserve's prudent approach.
Amid the data, one particular sector has drawn the attention of officials – the service-sector prices. These prices witnessed a 0.5% increase, marking the most significant jump since the onset of the year. When housing and energy components are excluded, inflation in services accelerated to 0.4%. Additionally, the uptick in spending can be attributed to both goods and services, with cars, prescription medications, and international travel being prominent contributors. A thriving labor market has been the primary pillar supporting household spending, while other elements, such as an unparalleled rise in household wealth this year and residual savings from the pandemic era, have also played integral roles.
Nevertheless, there are indicators pointing towards potential economic constraints. While wages and salaries saw a 0.4% increase, real disposable income underwent a decline for three consecutive months. Consequently, consumers have resorted to dipping into their savings, leading to the savings rate plummeting to 3.4% - the lowest recorded this year. Such statistics raise questions regarding the sustainability of the current consumer spending rate. Concurrently, other data released earlier highlighted a 4.9% annualized economic growth rate in Q3, propelled primarily by consumer spending. However, predictions for this quarter are more conservative, forecasting a mere 0.7% annualized growth, attributed to factors like soaring borrowing costs and geopolitical tensions in the Middle East.
This article was originally published on Quiver Quantitative