U.S. Economy Experiences Decrease in Spending and Rising Prices

The U.S. economy is showing signs of reversing its trend of rising consumer spending and prices. According to the Commerce Department, consumer spending fell in November and December as shoppers became cautious due to rising costs, decreasing savings, and concerns about a recession.

Inflation is also slowing down, with consumer prices increasing by 5% in the year ending December, the lowest pace in over a year. This indicates that the economy is finally cooling off, which is positive news for the Federal Reserve, as they have been actively raising interest rates to decrease spending and slow down price increases.

According to Sarah Watt House, senior economist at Wells Fargo, the economy is on the right track, and medicine is taking effect. However, the path ahead is uncertain, and policymakers are expected to raise interest rates by another quarter point in the upcoming meeting, putting rates in a range of 4.5 to 4.75 percent. The Fed’s actions may not have yet been fully felt, and they plan to keep borrowing costs high for a significant period.

There are concerns that the Federal Reserve may not be able to effectively lower inflation without causing a recession. Additionally, there is a risk that the recent slowdown in inflation and spending may be temporary. Despite this, the strong labor market could continue to fuel the economy.

The current data shows that consumer prices only rose 0.1% in December and were up 5% from a year earlier, indicating a slowdown in inflation. The Personal Consumption Expenditures price index, closely related to the Consumer Price Index and the Fed’s preferred measure of inflation, has also been on a downward trend for the past six months.

The price index, minus food and fuel, rose 4.4% from the previous year, as predicted by economists in a Bloomberg survey. Consumer spending decreased in December, and November’s initial report of a slight increase was revised to decrease.

Despite rising incomes due to the strong job market, Americans are choosing to save more, indicating a growing caution about potential layoffs and a recession. Express clothing chain has noticed customers becoming more cost-conscious in their purchasing.

The Federal Reserve monitors spending trends and decides on interest rate adjustments for the coming weeks. According to recent data, companies are reintroducing more opening price points, indicating a return in price sensitivity among consumers.

However, demand for certain products, such as jackets with modern tailoring, remains strong, with little resistance to higher prices. The Employment Cost Index, released on Tuesday, will give insight into wage growth and its effect on inflation. Fed governor Christopher Waller is cautious in slowing the economy and inflation to prevent a recession.