October 3, 2022 — Consumer Spending Holds Despite Inflation


Household spending rose by 0.4 percent in August after being down 0.2 percent in July. The personal consumption index rose 6.2 percent year over year in August, down from a 6.4 percent increase in July.  Core PCE (excluding food and energy) was up 4.9 percent year over year, up from a 4.7 percent annualized increase in July.

Households, the primary drivers of the US economy, have been able to keep up with inflation, in part, due to a tight labor market which has been keeping unemployment and layoffs at a low. Additional shortfalls are being covered by using savings. The personal saving rate has fallen to 3.5 percent from 9.5 percent a year ago. Economists are pessimistic about the consumers’ ability to keep spending at the current levels.  The Fed’s concern about persistent and sustained inflation is supported by the data.

The Fed now predicts US GDP will grow at an annualized rate of 2.4 percent in Q3. Unless inflation suddenly abates, the Fed will have to continue to raise rates to rein in inflation at the expense of economic growth.