US consumer spending dips for second straight month as inflation cools

PCE, the Federal Reserve's preferred inflation metric, rose by 5 per cent in December

A report from the US Commerce Department showed that consumer spending dipped for a second straight month. AFP

A key measurement for US inflation released on Friday showed that prices continued to cool in December as consumer spending dipped, clearing the way for the Federal Reserve to issue a smaller interest rate increase when it meets next week.

The personal consumption expenditures (PCE) price index, the Fed's preferred inflation metric, rose by 5 per cent in December year-on-year, down from November's rate of 5.5 per cent, data from the Commerce Department showed.

The PCE price index ticked up by 0.1 per cent from November to December. Prices for goods decreased 0.7 per cent and energy costs decreased 5.1 per cent. Prices for services and food increased.

Core PCE, which excludes food and energy, increased by 4.4 per cent year-on-year, down from 4.7 per cent in November.

The latest data point to a decrease in spending, as Americans appear to be feeling the pain of rising costs.

PCE is the Fed's preferred gauge of inflation as it provides a more comprehensive understanding of consumer behaviour and how households react to changing prices.

The Commerce Department's report showed that consumer spending dipped by 0.2 per cent for the month of December, while personal incomes rose by 0.2 per cent.

The dip in consumer spending increases the risk of the US entering a recession, as it shows that households are changing their behaviour — such as purchasing cheaper goods and services — in reaction to higher prices.

Goldman Sachs estimates that the probability of the US entering a recession this year is 35 per cent.

The Fed raised its interest rate seven times last year to the range of 4.25 per cent to 4.5 per cent, increasing borrowing costs such as mortgages and car loans.

Perhaps nothing has been hurt more by the Fed than the housing market, which saw mortgage rates climb to more than 7 per cent last year. The average long-term mortgage rate this week dipped to 6.13 per cent, showing some signs of relief, according to mortgage buyer Freddie Mac.

Policy officials are expected to raise interest rates by a quarter of a percentage point when they meet next week.

Updated: January 27, 2023, 6:21 PM