U.S. Consumer Spending and Inflation Slows as Federal Reserve Raises Interest Rates

In November, U.S. consumer spending barely rose, and annual inflation increased at its slowest pace in 13 months. However, demand may not be cooling fast enough to discourage the Federal Reserve from driving interest rates higher next year.

Slowing Economic Activity

Data from the Commerce Department also showed a modest gain in orders for locally manufactured capital goods last month, indicating that slowing economic activity heading into 2023 amid rising borrowing costs. The U.S. central bank is attempting to slow demand for various things, such as housing and labor, as it tries to bring inflation back to its 2% target.

Moderation in Consumer Spending

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by 0.1% after surging 0.9% in October. Economists polled by Reuters had forecast consumer spending rising 0.2%. Some of the moderation in spending reflected a shift in demand from goods to services. Slowing price increases for some goods also lowered the dollar amount of consumer spending.

Fed’s Policy Changes

The Fed has raised interest rates at a rapid pace this year as it tries to temper consumer and business demand, hoping to force price increases to moderate. These rate increases are now affecting the economy, slowing the housing market, cooling demand for new business investments, and potentially weakening the labor market. However, it is not yet clear how much the Fed’s policy changes will slow down the overall economy. So far, spending and hiring have both been relatively resilient, leading policymakers and economists to closely watch each new data report for any hint of how consumers are faring.