For the second straight month, consumer spending dropped in December as consumers still continue to feel the effects of the rapid inflation we say throughout 2022. As incomes continued to rise, which reflected a strong job market, instead of continuing to spend, Americans chose to save more.
The Numbers
In December, personal spending fell by .2 percent said the Commerce Department on Friday, and after adjusting for inflation, spending fell .3 percent. In November the government initially reported a modest increase in spending, which was revised to show a small decline instead. Before the Federal Reserve announces its next interest rate decision on Feb. 1, Friday’s data is among the last readings on the economy the Fed will receive. According to analysts, the central bank is widely expected to raise borrowing costs by a quarter of a point, slowing its pace of rate moves to give officials more time to see how the economy is shaping up.
Labor Market Trends
When attempting to determine how much policy adjustment is needed, central bankers pay particular attention to trends in the labor market and spending. In order to avoid losing customers, companies have to increase prices more slowly as a result of the Fed’s rate increases.
Despite the Fed’s rate changes last year, the economy remained relatively resilient. Americans have gradually but steadily spent down extra money they tucked away during the depths of the pandemic, while consumer savings are being devoured by rapid inflation. Others have been able to afford products and services because of a strong labor market and solid wage growth.
Wrap Up
However, the Fed’s policies are expected to restrict the economy this year, resulting in a slower job market and economy. Based on the central bank’s most recent economic projections, inflation will drop notably as that occurs.