U.S. consumers increased their spending by a solid 0.3% in October, while their incomes grew 0.4%. Both were healthy gains that indicated the all-important holiday shopping season was off to a good start.
The October increase in consumer spending followed a much larger 0.9% rise in September, the Labor Department reported Thursday–the September climb had been the biggest in eight years. The rise in incomes last month matched the September result, with both months showing the best performance since February.
The October gain in spending after the surge in September was viewed as evidence of good momentum behind consumer spending, which accounts for 70% of economic activity, at the start of the fourth quarter.
A key measure of inflation rose 1.6% over the last 12 months. That is still below the Federal Reserve’s target for inflation of annual price increases of 2% and represented a slip from a 12-month gain of 1.7% in September.
Inflation has been below the Fed’s 2% target for more than five years. Federal Reserve Chair Janet Yellen told a congressional committee this week that there were good reasons for the decline before this year; a deep recession, a strong dollar holding down import prices, and a big fall in oil prices. But she said the shortfall in inflation this year was something of a mystery.
However, she maintained that she still believed inflation would resume rising toward the Fed’s 2% goal. The central bank is expected to hike its key policy rate for a third time when it meets in December.
“We continue to see a modest acceleration in core inflation in the months ahead as enough to justify three rate hikes between now and the end of 2018,” said Royce Mendes, senior economist at CIBC Capital Markets, in a research note. “The slightly better than expected results should be positive for the dollar and negative for fixed income.”
The 0.3% rise in consumer spending came despite the fact that spending on durable goods such as autos actually fell 0.1% last month. That decline was offset by a 0.2% increase in spending on nondurable goods—items such as clothing and food not expected to last three years—and a 0.3% increase in spending on services, a category that covers such things as doctor’s visits and utility bills.
The personal saving rate rose to 3.2% of after-tax income in October, up from 3% in September.
After a lacklustre start to the year, the overall economy picked up in the spring with growth, as measured by the gross domestic product, rising at 3.1% rate in the second quarter and 3.3% in the third quarter. It marked the first back-to-back quarterly gains above 3% in three years. Economists believe growth will slow a bit in the current October-December quarter but still remain close to 3%.