Consumer spending rose in September despite inflation eating wage gains

Consumer spending rose in September even as stubborn inflation wiped out wage gains, according to data released Friday by the Bureau of Economic Analysis (BEA).

Personal consumption expenditures (PCE), a measure of what households spend on goods and services, rose 0.6 percent in September and 0.3 percent when adjusted for inflation, according to the BEA, the same rates of growth as in August. 

American households were willing to dole out more money even after their inflation-adjusted take home pay was unchanged from September. While disposable personal income increased 0.4 percent last month, consumer prices rose 0.3 percent in September and 0.5 percent without food and energy items included, as measured by the PCE price index.

“Consumers spent at a moderate clip in September even as high inflation continued to squeeze their budgets,” Lydia Boussour, senior economist at EY-Parthenon, wrote in a Friday analysis.

“Consumers ramped up their purchases of nondurable goods such as clothing and gasoline and continued to favor services and experiences,” she continued.

Household spending on goods rose in September for the first time since June, increasing 0.3 percent despite steady pressure on already inflated prices. Spending on services also rose at a solid 0.8 percent clip, but slightly lower than the 1 percent gain in August.

The increases came even as prices were up 6.2 percent over the past 12 months, the same annual inflation rate as in August, according to the PCE price index, which is the Federal Reserve’s preferred gauge of inflation.

Core inflation — which excludes food and energy items — rose even faster, hitting an annual rate of 5.1 percent in September after an August annual inflation rate of 4.9 percent.

While inflation has come down slightly, it still remains well above the Fed’s annual 2 percent target.

“These data confirm the Federal Reserve has more work to do to cool demand and reduce inflation,” Boussour wrote.

The Fed is on track to raise interest rates by 0.75 percentage points at next week’s meeting of the Federal Open Market Committee, the panel of bank officials responsible for monetary policy. The Fed has rapidly boosted its baseline interest rate range since March, raising it by a total of 3.25 percentage points, but has yet to make a serious impact on inflation or the consumer spending that has helped keep it high.

Boussour, like many economists, expects consumer spending to eventually decline toward the end of the year as higher interest rates and stubborn inflation begin to take a toll on the job market.

“With household confidence historically depressed and savings cushions rapidly dwindling, consumers will grow increasingly reluctant to spend, especially as labor market conditions deteriorate and household wealth takes a hit from falling stock prices and declining home values,” she wrote.

The job market has remained strong amid economic headwinds, with the U.S. adding roughly 420,000 jobs each month this year and keeping the jobless rate at 3.5 percent, in line with its pre-pandemic level. Jobless claims have also been below pre-pandemic levels despite growing concerns about a potential recession.

But Fed officials are deliberately aiming to weaken the job market, saying it is essential to slow down wage growth and reduce the number of open jobs to make inflation come down. Several Fed leaders have warned that further interest rate hikes will bring “pain” to the economy and expect to push the unemployment rate up to 4.4 percent by the end of 2023 — which would leave more than 1 million Americans jobless.

“The housing market is already tumbling under the weight of surging mortgage rates, but the full economic impact of the aggressive policy tightening by the Federal Reserve on the broader economy has yet to be felt,” Boussour wrote.

Updated at 9:48 a.m.