US consumer spending falls in December; inflation slows to 5%

US consumer spending fell in December, putting the economy on a path of lower growth heading into 2023, while the inflation continued to fall, which could give rise to the Federal Reserve to keep slowing down the pace of your hikes interest rates next week.

Consumer spending, which accounts for more than two-thirds of US economic activity, fell 0.2% last month, the Commerce Department reported Friday.

Data for November was revised down to show spending falling 0.1% instead of rising 0.1% as previously reported. Economists polled by Reuters had expected consumer spending to fall 0.1 percent.

The data was included in the fourth-quarter Advance Gross Domestic Product report released Thursday, which showed consumer spending maintained a strong pace of growth and helped the economy expand at an annualized rate of 2.9 percent.

If the weak trend continues into 2023, that increases the risks of a recession for the second half of the year, but also reduces the need for the central bank to maintain overly aggressive monetary policy.

The Fed’s fastest rate hike cycle since the 1980s has pushed the housing market into recession and the manufacturing sector is in the early stages of a decline.

Higher borrowing costs have reduced demand for goods, which are often bought on credit. Although the growth in spending on services is helping to anchor consumption, some households, especially those with lower incomes, have exhausted the savings accumulated during the covid-19 pandemicwhich limits the increase in disbursements.

The personal consumption expenditures (PCE) price index rose 0.1% last month, following a similar increase in November. In the 12 months to December, the PCE price index rose 5.0% after advancing 5.5% in November.

Excluding the volatile food and energy components, the PCE price index rose 0.3% after gaining 0.2% in November. The so-called core PCE price index rose 4.4% yoy in December, after rising 4.7% in November.

The Fed follows the PCE price indices for its monetary policy. Other measures of inflation have also slowed significantly.

Last year, the Fed raised its key interest rate by 425 basis points, from near zero to a range of 4.25% to 4.50%, the highest since late 2007. Financial markets have priced in a rate hike 25 basis points at the January 31-February 1 central bank meeting, according to CME’s FedWatch tool.