U.S. personal spending declines in December

By Scott Kanowsky

Investing.com -- U.S. consumer spending contracted in the closing month of the year, according to Commerce Department data on Friday, in a possible sign that elevated inflation and a string of aggressive interest rate hikes by the Federal Reserve throughout 2022 may be taking a toll on wider demand.

Personal spending dropped by 0.2% in December, piling on to a downwardly revised decline of 0.1% in November.

Meanwhile, the Federal Reserve's preferred measure of inflation accelerated slightly as expected in December compared to the prior month, the Commerce Department said.

The core personal consumption expenditure price index, which strips out volatile items like food and energy, ticked up to 0.3% from 0.2% in November, in line with economists' estimates. The annual rate moved down to 4.4%, slowing from 4.7% and also meeting expectations. However, this number remains well above the Fed's 2% target for price increases.

When including energy and food, price growth remained unchanged at 0.1% month-on-month. Compared to the same period one year ago, the PCE index dropped to 5.0% from 5.5%.

The readings add to an emerging picture of the state of the American economy ahead of the Fed's latest rate decision next week.

A separate release on Thursday showed that the U.S. expanded by 2.9% in the fourth quarter, down from 3.2% in the prior three-month period but above economists' estimates for growth of 2.6%. The expansion was partly driven by a rise in consumer and government spending, as well as private inventory investment.

Elsewhere, the number of Americans filing for unemployment insurance last week unexpectedly dropped, suggesting lingering tightness in the U.S. labor market.

Seasonally adjusted initial jobless claims dipped to 186,000 in the week ending January 21 from an upwardly revised level of 192,000 in the prior week. Economists had predicted the figure would jump to 205,000. The rolling four-week average, which aims to adjust for volatility in the numbers, decreased by 9,250 to 197,500.

Analysts at ING argued that expectations are now firmly set around the Fed raising borrowing costs by a more modest 25 basis points at its January 31 to February 1 meeting.

"While inflation is still well above target and unemployment is at a cycle low, there are signs that the economy is responding to tighter monetary policy and the Fed will be cognisant of fears that hiking rates too hard and fast risks toppling the economy into recession," the ING analysts said in a note.