Consumer Spending Could Flash Mixed Signals. Here’s What You Need to Watch.
Americans spent more in August on expensive gasoline, but the Fed could be pleased with cooler underlying inflation
Higher gasoline prices likely boosted August consumer spending and kept inflation elevated, while underlying price pressures cooled, analysts say.
- Economists surveyed by The Wall Street Journal estimate consumer spending rose 0.4% last month, down from a 0.8% rise a month earlier. That still-strong August increase was fueled by solid growth in jobs and wages, but also rising pump prices. Keeping up that pace this fall could be a challenge as Americans face the resumption of student-loan repayments, the depletion of pandemic savings and high interest rates.
- Other broad measures of inflation rose in August, largely because of energy costs, but underlying prices appear more tame. When excluding volatile food and energy costs, economists estimate that the core personal-consumption expenditures price index rose 3.9% in August from a year earlier, slowing from a 4.2% annual increase in July.
- Underlying inflation has cooled as the Federal Reserve aggressively raised interest rates over the past 18 months. Central bank officials say they need to see this trend continue before determining whether to raise rates again.
- The Commerce Department will release the August personal income and outlays report at 8:30 a.m. Eastern time Friday.
Fed seeks ‘convincing evidence’ of softer inflation
The Fed held its benchmark interest rate steady at a 22-year high last week, and most officials penciled in one more rate increase for this year. Fed Chair Jerome Powell said officials want to see “convincing evidence” that they have raised rates enough to sustainably lower inflation to their 2% goal.
“We’re seeing progress, and we welcome that, but we need to see more progress,” he said. “We want to see that it’s more than just three months.”
Friday’s Commerce report will include the Fed’s preferred inflation gauge, the PCE price index. While the separate consumer-price index showed firmer core prices in August, analysts expect a milder increase in the core PCE index. Several areas of strength in the CPI, such as airfares, are calculated differently in the PCE price index and were lower last month.
Fed officials’ projections indicate they expect core inflation to cool further next year. But even if that occurs, the Fed risks holding interest rates too high for too long, said Simona Mocuta, chief economist at State Street Global Advisors. She worried that would lower the Fed’s chances of achieving a so-called soft landing—beating inflation without causing a recession.
“I do wonder whether the soft landing can truly survive the Fed,” she said.
Consumers remained resilient this summer
Consumer spending, the economy’s main engine, has been strong much of this year. A solid labor market and slower price increases have boosted Americans’ inflation-adjusted incomes, propelling purchases.
Shoppers snapped up vehicles earlier this year as they flowed back onto dealership lots amid easing supply-chain disruptions. They also spent more on experiences, flocking to “Barbie” and “Oppenheimer” this summer and splurging on tickets to Taylor Swift and Beyoncé concerts.
The spending spree bolstered economic growth. Many forecasters think the economy is expanding faster this quarter than earlier this year.
Will the American consumer pull back?
Some of the factors that helped consumer spending in the past two years are fading and signs of stress are emerging: Many Americans are dipping into savings. The personal saving rate, a measure of how much money people have left each month after outlays and taxes, has trended down.
“The excess savings is drying up and the credit has gotten a lot more expensive, so I think that diminishes the resilience angle,” said Tim Quinlan, senior economist at Wells Fargo. “Our staying power is going to be tested.”
New challenges could further dent spending, including the resumption of student-loan repayments and higher gas prices, which cut into Americans’ budgets for dining out and travel. Strikes and a potential government shutdown could at least temporarily curtail the spending power of some workers.
The consumer’s resilience will depend in large part on whether the labor market falters. While unemployment is still historically low, it has edged higher recently. If companies begin to widely lay off workers, incomes will take a hit.
“That’s where I get antsy about the capacity for consumers to keep going,” Quinlan said.