US consumer spending rises solidly, inflation appears stuck above Fed target

WASHINGTON (Reuters) -U.S. consumer spending increased slightly more than expected in October, suggesting the economy retained much of its solid growth momentum early in the fourth quarter, but progress on lowering inflation appears to have stalled in recent months.

The lack of success in bringing inflation back to the Federal Reserve's 2% target, together with the prospect of higher tariffs on imported goods from the incoming Trump administration, could narrow the scope for interest rate cuts from the U.S. central bank next year. 

The Fed is still expected to deliver a third rate cut in December, with other data on Wednesday showing more unemployed people were experiencing long bouts of joblessness in mid-November.  

"December remains in play, but further rate cuts in 2025 are fading," said David Russell, global head of market strategy at TradeStation. 

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after an upwardly revised 0.6% advance in September, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending would gain 0.3% after a previously reported 0.5% increase in September.

Adjusted for inflation, consumer spending edged up 0.1%. Spending was largely driven by strong demand for services, including healthcare, housing and utilities, financial services and insurance, dining out and hotel stays as well as transportation and recreation. Services spending rose 0.5%.

Goods outlays were unchanged as an increase in purchases of motor vehicles and parts was offset by lower receipts at service stations because of cheaper gasoline. There were also declines in outlays of apparel, furniture and other long-lasting manufactured household equipment.

Consumption is being largely underpinned by low layoffs, with additional help from strong household balance sheets thanks to a stock market rally and high home prices. 

Household savings also remain lofty. The saving rate increased to 4.4% from 4.1% in September. Income at the disposal of households rose 0.6%, boosted by a 0.5% gain in wages. After accounting for inflation and taxes, income at the disposal of household rose 0.4% after edging up 0.1% in September.   

Economists are anticipating a fairly decent holiday shopping season, though high prices are squeezing budgets. Data from Adobe showed consumers have in the first 24 days of November spent  $77.4 billion  online,  up 9.6% on  year-over-year basis.  

The Mastercard Economics Institute described this holiday shopping season as being characterized by "the value-conscious consumer who feels stretched by economic pressures," and "a confident consumer who feels more free to spend."

U.S. stocks traded lower. The dollar fell against a basket of currencies. U.S. Treasury yields fell.

LOW LAYOFFS

Though inflation is cooling, the trend has slowed. The personal consumption expenditures price index climbed 0.2% in October, matching September's unrevised gain. In the 12 months through October, the PCE price index increased 2.3% after advancing 2.1% in September.

Excluding the volatile food and energy components, the PCE price index rose 0.3%, matching the increase in September. 

In the 12 months through October, core inflation increased 2.8% after climbing 2.7% in September. The central bank tracks the PCE price measures for monetary policy.

There are concerns inflation could rise next year if President-elect Donald Trump pushes ahead with some of his campaign promises. Trump said on Monday he would impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on goods from China, on his first day in office.

Economists at Goldman Sachs estimated the tariffs, if implemented, would increase core PCE inflation by 0.9%.

Growing signs of labor market slack could, however, outweigh concerns about higher inflation readings. 

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 213,000 for the week ended Nov. 23, the lowest level since April. Economists had forecast 216,000 claims for the latest week.

Claims have retreated from the nearly 1-1/2-year high seen in early October, which was the result of hurricanes and strikes at Boeing and another aerospace company. 

They are now at levels consistent with low layoffs and a rebound in employment in November. Despite the anticipated bounce back in payrolls, the unemployment rate is likely to be unchanged or even rise this month. 

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 9,000 to a seasonally adjusted 1.907 million during the week ending Nov. 16, the highest level since November 2021, the claims report showed. 

The so-called continuing claims data covered the period during which the government surveyed households for November's unemployment rate. They increased between the October and November survey periods, indicating that many laid-off workers are finding it difficult to land new jobs.

The jobless rate has held steady at 4.1% for two straight months. The employment report for November would be crucial for the U.S. central bank's rate decision next month.

Financial markets expect a 25-basis-point rate cut at the Fed's Dec. 17-18 policy meeting, but some economists see it as a toss-up. Minutes of the Fed's Nov. 6-7 policy meeting published on Tuesday showed officials appeared divided over how much farther they may need to cut rates. 

The central bank reduced rates by 25 basis points earlier this month, lowering its benchmark overnight interest rate to the 4.50%-4.75% range. 

It initiated its policy easing cycle in September, which marked its first reduction in borrowing costs since 2020, after hiking rates by 525 basis points in 2022 and 2023 to quell inflation.

A separate report on Wednesday suggested business spending on equipment started the quarter on a soft note. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2% in October after a 0.3% gain in September, the Commerce Department's Census Bureau said.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)