D.C., October 28 (Reuters) - While underlying inflation pressures continued to soar, U.S. consumer spending increased more than anticipated in September, leaving the Federal Reserve on pace to raise interest rates by other three-quarters of a percentage point next week.
However, additional statistics released by the Labor Department on Friday showed that private industry pay growth slowed significantly in the third quarter, which is welcome news in the battle against persistently high inflation. Inflation-sensitive areas including retail, construction, and finance saw a moderation. There was an improvement in fields like healthcare and education, which are nevertheless struggling with a lack of qualified workers.
According to Christopher Rupkey, chief economist of FWDBONDS in New York, "Americans may claim to be concerned about inflation, but they are still out buying, which keeps the economy going for another quarter." "There can be little possibility that the impact of sluggish demand on price pressures will abate in the foreseeable future."
Consumer spending, which makes up more than two-thirds of the American economy, increased 0.6% last month, according to the Commerce Department. Data for August were updated to reflect an increase in spending of 0.6% rather than the previously reported 0.4%.
Reuters polled economists, who predicted that consumer expenditure would increase by 0.4%. In addition to increasing their spending on food, clothes, prescription drugs, and recreational products, consumers increased their purchases of automobiles. After falling for two consecutive months, consumer spending on goods increased by 0.3%.
Spending on services increased as well, with housing and utilities rising along with travel and dining out. Services spending increased by 0.8%.
The 2.6% annualized growth rate in the third quarter was primarily driven by a substantial reduction in the trade deficit, while domestic demand registered its lowest level in two years.
Consumer expenditure growth dropped from the 2.0% rate seen in the April-June quarter to 1.4%. However, the figures for September indicated that momentum increased at the end of the quarter, which is encouraging spending in the last three months of 2022.
The Fed's benchmark overnight interest rate has increased at the fastest rate in at least a generation, from near zero in March to the current range of 3.00% to 3.25%. Three successive 75-basis-point increases have been part of the tightening.
Some analysts believe that because of the slowing demand seen in the third quarter, the US central bank may indicate at its policy meeting on November 1-2 that it would implement lower rate increases in December and early 2019. However, much would rely on inflation. Consumers' expectations for inflation in the short term and over the next five years have risen since September, according to a study released on Friday by the University of Michigan.
Wall Street's stocks increased. Compared to a basket of currencies, the dollar increased. US Treasury yields decreased.
STILL HOT INFLATION
The personal consumption expenditures (PCE) price index increased by 0.3%, mirroring the increase from August, according to a report from the Commerce Department. The PCE price index rose 6.2% in the year that ended in September after increasing by the same percentage in August.
The PCE price index increased 0.5% when the volatile food and energy components were excluded, mirroring the gain from August. In September, the so-called core PCE price index increased 5.1% year over year after rising 4.9% in the 12 months before to August.
For its 2% inflation objective, the Fed keeps an eye on the PCE price indices. Other measurements of inflation are far higher. On a yearly basis, the consumer price index rose 8.2% in September.
But there are some reasons for optimism. The Employment Cost Index, the most comprehensive gauge of labor expenses, increased 1.2% last quarter after rising 1.3% from April to June, according to a separate report released by the Labor Department on Friday.
Because it accounts for changes in employment mix and quality, the ECI is widely regarded by policymakers and economists as one of the best indicators of labor market slack and a core inflation forecast. Onlookers are keeping an eye on it to see if wage growth has peaked.
After rising 5.1% in the second quarter, labor expenses grew 5.0% year over year.
After growing 1.4% in the second quarter, wages and salaries increased 1.3% this quarter. After increasing by 5.3% in the previous quarter, they increased by 5.1% year over year.
Even more encouragingly, after rising 1.6% in the second quarter, private sector salaries increased by 1.2%. Due to this, the annual growth in private sector salaries was reduced from 5.7% in the second quarter to 5.2% now.
This is consistent with recent information that points to a deceleration in wage growth, such as average hourly wages in the Labor Department's monthly employment report and the pay tracker of the Atlanta Fed. Even while "wage growth remained broad" in early October, the Fed's "Beige Book" report from last week highlighted that "a softening was recorded in some areas."
According to Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina, "inflationary pressures arising from the labor market may be going off the boil, but it will be some time before they are sufficiently tepid for the Fed."
However, salaries for employees of state and local governments increased by 2.1% after increasing by 0.7% in the second quarter, most likely as a result of teacher pay raises at the beginning of the academic year.
Following a 1.2% increase in the April-June quarter, benefits increased by 1.0%. They increased by 4.9% over the previous year.
Consumer spending saw another month of increase in September despite inflation eroding consumers' purchasing power, placing it on a higher growth trajectory going into the fourth quarter. Consumer expenditure rose 0.3% last month after adjusting for inflation, mirroring the gain from August.
The ECI is widely regarded by policymakers and economists as one of the better indicators of labor market slack and a core inflation forecast since it takes into account changes in employment quality and mix. It is being monitored for evidence that the rate of wage increase has peaked.
After rising 5.1% in the second quarter, labor expenses rose 5.0% year over year in the third quarter.
Following a 1.4% increase in the second quarter, wages and salaries increased by 1.3%. They increased 5.1% year over year after increasing 5.3% in the previous quarter.
Even more encouragingly, private sector salaries increased by 1.2% following a 1.6% increase in the second quarter. This reduced the yearly growth in private sector salaries from 5.7% in the second quarter to 5.2% now.