US consumer spending cooled last month, core prices picked up

Income growth in the US slowed to 0.2%.

US consumer spending decelerated in December, indicating the economy’s main engine lost some momentum heading into 2020. The Federal Reserve’s preferred underlying inflation gauge picked up, backing Chairman Jerome Powell’s view that price gains are moving toward the central bank’s goal.

Consumer outlays for goods and services, which account for about 70% of gross domestic product, increased 0.3% from the prior month after an unrevised 0.4% advance in November, Commerce Department data showed Friday. The report also showed income growth slowed to 0.2%, reflecting a decrease in farm subsidies, while the Fed’s favoured core price gauge exceeded estimates with a 0.2% rise, the most since July.

The data add to other signs that consumers may be poised to offer the record-long expansion less of a boost than before. The figures provide additional detail after a report Thursday showed fourth-quarter GDP growth matched the prior three months but consumption slowed for a second straight period.

Consumers last year aided the world’s largest economy as it was whipsawed by trade policy, a manufacturing slump and faltering business investment. While tensions with China have cooled somewhat, headwinds from factories and investment remain.

After adjusting for inflation, spending climbed 0.1%. That gain was driven by prescription drugs and health care, suggesting that discretionary outlays may be less robust than the headline figures indicate.

Pay gains

A solid labour market continues to support spending, though pay gains show signs of deceleration despite high labour demand. The Commerce Department’s report showed wages and salaries posted a 0.3% monthly gain that was the weakest since September.

The inflation figures show price pressures are still short of the Fed’s goal, even after the central bank cut interest rates three times last year. Powell on Wednesday expressed confidence that inflation would approach 2% in coming months as “unusually low readings from early 2019 drop out of the calculation.”

The broader personal consumption expenditures price gauge, which the Fed officially targets for 2% inflation, rose 0.3% from the prior month, topping the median estimate in Bloomberg’s survey, and was up 1.6% from a year earlier.

The core PCE price index, which excludes food and energy, increased 1.6% in December from a year earlier, up from a six-month low of 1.5% in November. Policymakers view the core gauge as a better indicator of underlying price trends and have said they’re also aiming for it to rise 2%.

Higher inflation

While Thursday’s GDP report showed core prices rose at a 1.3% annualised pace in the fourth quarter, Friday’s monthly data show that inflation was moving higher at the end of the period.

The data follow the latest statement from Fed policymakers, who on Wednesday kept their main interest rate unchanged while stressing the importance of lifting inflation to their target.

In a separate report Friday from the Labor Department, the employment cost index, a broad gauge monitored by the Fed, rose 0.7% in the fourth quarter from the prior period, as projected. The measure decelerated to a 2.7% annual gain, consistent with other data showing slower gains for workers in late 2019.

Wages and salaries for private workers rose 3% for a fourth straight quarter — indicating they likely have plateaued despite unemployment at a half-century low — and the 0.7% rise from the prior quarter was down from 0.9%.

By sector, wage and salary gains cooled in construction, financial activities and professional and business services. The government’s quarterly ECI reading covers employer-paid taxes such as Social Security and Medicare along with other benefits.

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