US consumer spending softens in December even as inflation eases

US consumer spending fell in December, putting the economy on a lower growth path heading into 2023, while inflation continued to subside, which could give the Federal Reserve room to further slow the pace of its interest rate hikes next week.

Consumer spending, which accounts for over two-thirds of US economic activity, dropped 0.2 per cent last month, the Commerce Department said on Friday.  Data for November was revised lower to show spending slipping 0.1 per cent instead gaining 0.1 per cent as previously reported. 

The data was included in the advance fourth quarter gross domestic product report, which showed consumer spending maintaining a solid pace of growth and helping the economy to expand at a 2.9 per cent annualised rate.

The weak handover to 2023 raises the risks of a recession by the second half of the year, but also reduces the need for the US central bank to maintain an overly aggressive monetary policy stance. 

The Fed’s rate hiking cycle has pushed the housing market into recession and manufacturing is in the early stages of a downturn. Higher borrowing costs have undercut demand for goods, which tend to be bought on credit. Though growth in spending on services is helping to anchor consumption, some households, especially those with lower incomes, have depleted savings limiting the gains.

The personal consumption expenditures (PCE) price index edged up 0.1 per cent last month after a similar gain in November. In the 12 months through December, the PCE price index increased 5.0 per cent after advancing 5.5 per cent in November.

Excluding the volatile food and energy components, the PCE price index rose 0.3 per cent after climbing 0.2 per cent in November.