Consumer Spending Sees Modest Rise as Inflation Stays Stubbornly High

People walk along a shopping street in lower Manhattan in New York City on July 5, 2019. Spencer Platt/Getty Images

Consumer spending—a key driver of the U.S. economy—saw a modest bump in September, even as inflation remained stuck at a 30-year high for the fourth month in a row and labor costs in the third quarter rose at their highest level in 20 years.

The Commerce Department said on Oct. 29 that that the Fed’s preferred inflation gauge, the so-called core PCE price index, rose by 3.6 percent in the 12 months through September. That’s the fourth consecutive month that the measure has been stuck at an annualized 3.6 percent—the highest reading in 30 years and well above the Fed’s 2 percent target.

On a month-over-month basis, core PCE rose by 0.2 percent, down slightly from the 0.3 percent rate the month before and a sign inflationary pressures may be moderating.

By contrast, U.S. labor costs rose in the third quarter by the most since 2001, as businesses boosted wages to attract and retain workers amid a hiring crunch, suggesting inflation could stay elevated for some time. The Employment Cost Index, the broadest measure of labor costs, rose 1.3 percent in the July-September quarter, the Labor Department said Friday. That’s the biggest gain in this labor cost gauge in 20 years.

“While wage increases were initially concentrated in lower wage industries, more recently wage pressures have been broadening across industries,” said Veronica Clark, an economist at Citigroup in New York.

“Upward pressure on wages reaching relatively higher wage industries would suggest a greater chance that rising labor costs, along with rising prices for various other inputs, are passed on through higher consumer prices,” she added.

The Commerce Department also reported on Friday that consumer spending—which accounts for around 70 percent of gross domestic product (GDP)—rose by a relatively lackluster 0.6 percent over the month in September, after advancing 1.0 percent in August.

On a quarterly basis, consumer spending plunged to 1.6 percent in the third quarter after advancing by a robust 12 percent in the second quarter, according to a separate Commerce Department report. It showed GDP in the July-September quarter growing by a tepid 2.0 percent, pulled down by weak consumption expenditures. Spending on durable goods—which includes motor vehicles and parts—plunged by 26.2 percent compared to the second quarter.

At the same time, the personal savings rate fell to 7.5 percent in September, the lowest pandemic-era level, suggesting consumers dipped into their savings to support spending.

Taken together, the data suggests the U.S. economy has hit a soft patch, even as inflation remains stubbornly high.

Treasury Secretary Janet Yellen said Friday said she continues to see inflation as a temporary supply side-driven phenomenon that will normalize next year, and that President Joe Biden’s big spending package will actually have an anti-inflationary effect by smoothing some supply-side dislocations and footing the bill for some costs facing American families.

Yellen made the remarks in separate interviews on CNN, CNBC, and CBS in Rome, where she is attending the G-20 conference of global leaders.

Sen. Tom Cotton (R-Ar.) took to Twitter to comment on Yellen’s remarks: “In March, Janet Yellen said inflation is ‘not a significant risk.’ In May, she said it would only last for ’several more months.' Now, she says Biden’s spending will somehow REDUCE inflation. Once again, Yellen is wrong. And her credibility is shot.”

With her remarks, Yellen made clear she continues to stand by the “transitory” inflation narrative, even as a growing number of economists have challenged that framing on signs of sticky price pressures that are changing behavior in areas like future inflation expectations, as well as growing wage demands and the willingness of businesses to raise them to keep and attract workers.