Inflation and consumer spending in the US fell in December

WASHINGTON (AP) — The Federal Reserve’s preferred inflation target eased in December, and consumer spending fell, the latest evidence that a series of Fed rate hikes are slowing the economy.

Friday’s Commerce Department report showed prices rose 5% last month year-on-year, up from a 5.5% year-on-year rise in November. It was the third fall in a row.

Consumer spending fell 0.2% from November to December and has been revised down to show a 0.1% fall from October to November. Holiday sales last year were sluggish for many retailers, and overall spending figures for the last two months of 2022 were the weakest in two years.

The Fed has been steadily raising interest rates across the economy in a bid to slow spending, growth, and rising prices that have plagued the country for almost two years. Last year, the Fed raised the base rate seven times, and is going to do it again next week.

The central bank’s key rate, which affects many consumer and business loans, is currently in the range of 4.25% to 4.5%, compared to near zero levels in March last year. While inflation is slowing, most economists say they think the Fed’s tough drug will push the economy into recession sometime this year.

The Fed is in an increasingly delicate position. Chairman Jerome Powell stressed that the central bank plans to keep raising the key rate and keep it at a high level, possibly until the end of the year. However, this policy may become untenable if a sharp recession begins.

Friday’s data could heighten fears that the main driver of the economy, the willingness of US consumers to continue to spend freely, is starting to crack under the weight of higher prices and interest rates.

On Thursday, the government said the economy grew at a strong pace in the last three months of last year, but most of the growth was due to one-off factors: the deficit narrowed.

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In contrast, consumer spending in the October-December quarter was generally down quarter-on-quarter, and business investment declined sharply. Overall, the economy grew 2.9% year-on-year in the October-December quarter, slightly below the 3.2% growth rate in the previous quarter.

If consumers continue to be less willing to increase their spending, companies’ profits will shrink and many may be able to cut costs. This trend could eventually lead to waves of layoffs. Economists at Bank of America predict that the economy will grow slightly in the first three months of this year, but then contract in the next three quarters.

More frugal consumers will threaten a recession in the economy. But they can also help bring down inflation. Companies can’t keep raising prices unless Americans pay the higher costs.

Last week, the Federal Reserve’s Beige Book, which compiled scattered business reports across the country, said: “Many retailers have noted increased difficulty in enduring price increases, indicating greater price sensitivity on the part of consumers.”

A slew of large companies, mostly in the tech sector, have announced massive layoffs in recent months, fueling fears that a recession might be on the way. But these job cuts are not yet enough to raise the unemployment rate, which remains at a half-century low.

In fact, the number of people seeking unemployment benefits – the equivalent of layoffs – dropped to 186,000 last week, a very low historical figure. And Walmart, the country’s largest employer, said it would raise the minimum wage from $12 to $14 an hour to retain and attract workers.

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