Rising Consumer Spending Beats Forecasts as Core Inflation Holds Steady at 2.7%

Key Indicators Show Moderate Inflation, Strong Spending

The latest U.S. economic data for October 31 reveals a mixed landscape, highlighting ongoing consumer resilience in spending and moderate inflation pressures, along with rising employment costs. While most indicators came in close to expectations, deviations in the Employment Cost Index and Personal Spending provide insight into consumer and wage dynamics. Here’s a breakdown:

Core PCE Price Index Meets Expectations

The Core PCE Price Index, the Federal Reserve’s preferred inflation measure, rose 0.3% month-over-month in line with forecasts, while annual inflation remained at a steady 2.7%. This reading aligns with recent trends, signaling controlled inflation within the Fed’s 2% target range, though consistently higher month-over-month readings could keep policymakers cautious. The stable Core PCE data suggests that inflation remains elevated but manageable, indicating no immediate pressure on the Fed to accelerate rate hikes, though vigilance on underlying trends remains likely.

Personal Income Matches Forecast, Spending Exceeds

Personal Income rose by 0.3%, meeting expectations and demonstrating steady growth in household earnings. This income stability is critical for sustaining consumer purchasing power amid inflationary pressures.

However, Personal Spending outpaced forecasts, growing by 0.5% against the anticipated 0.4%. This increase signals a higher-than-expected consumer willingness to spend, especially on discretionary items, which may reflect confidence in the economic outlook. The rise in spending also suggests that inflation isn’t significantly dampening consumer activity, though it could add to price pressures if demand remains high.

Employment Cost Index Higher than Expected

The Employment Cost Index (ECI) posted a 0.8% increase for Q3, higher than the anticipated 0.7%, matching last quarter’s reading of 0.9%. Rising labor costs, often a precursor to broader inflation, signal strong wage pressure, reflecting a competitive labor market. If employment costs continue to rise, businesses may pass on higher labor expenses to consumers, potentially fueling future inflation. The above-expected ECI could influence Fed considerations, as sustained wage growth can complicate inflation control efforts.

Unemployment Claims Beat Forecast

Initial Unemployment Claims came in at 216,000, below the forecasted 229,000, indicating continued labor market resilience. This lower-than-expected reading reflects steady demand for labor and minimal layoffs, suggesting that the job market remains robust. Persistent strength in employment could support further consumer spending but also reinforces the possibility of wage-driven inflation pressures.

Outlook and Market Implications

Today’s data paints a picture of a resilient consumer base, stable income growth, and rising labor costs. With Core PCE inflation within target and spending above expectations, the economic outlook remains cautiously optimistic. However, the surprise in the Employment Cost Index and strong consumer spending might keep inflation concerns elevated.

Market Reaction:

• Bullish on consumer-related sectors, given strong spending data.
• Neutral to Bearish on fixed income, as rising wage costs might push the Fed toward a more cautious rate stance.
• Cautious on Equities: Wage pressures and inflation data suggest that the Fed could signal a more hawkish tone in future policy statements if inflationary pressures from the labor market persist.