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What you need to know
- Just before the holidays, October saw a marked improvement in household finances.
- A government report shows that personal income grew faster than anticipated, and outpaced inflation.
- The year-overyear rate of inflation increased in October in comparison to September. This was probably due to data fluctuations rather than an ongoing trend.
The U.S. household went into the holiday season with more money in their pocket than expected, despite a rise in inflation.
That's according to a report Wednesday from the Bureau of Economic Analysis on personal income and expenditures. This report shows that the personal income increased by 0.6% in the last month. It is the largest increase since March.
The Dow Jones Newswires/The Wall Street Journal survey of economics found that the rise was twice as high as forecasters’ expectations, which were 0.3%. Inflation, measured by Personal Consumption Expenditures Price Index (PCE), rose to 2.3% in the 12 months ending October. This is up from the 2.1% recorded in September, and was in line with expectations.
The tug-of war between the price increase and wage increases, which affects buying power, saw October’s household budgets gain ground. The inflation-adjusted, after-tax income of households rose by 0.4% to the highest level since January. This is after it remained flat during the summer months and increased only 0.1% in Septembre.
Some economists said that is a good sign for the economy's trajectory and retailers anticipating the holiday shopping season.
"The rebound in real income growth in October means consumers still have enough gas in the tank to pull off a decent holiday shopping season this year," wrote Scott Anderson, Chief U.S. BMO Capital Markets’ Economist.
What is the significance of PCE for the Fed according to this report?
The report will likely keep Federal Reserve officials on track to cut the central bank's influential fed funds rate when they meet next month.
After the pandemic the Fed increased its main interest rate, which was held at that level until September to try and cool down the economic climate. With inflation having cooled down close to the Fed's goal of a 2% annual rate, the Fed has been cutting rates to boost the economy and prevent a surge of unemployment.
Samuel Tombs is the chief U.S. macroeconomics economist for Pantheon Macroeconomics. He wrote a blog post that while October’s inflation data showed a rise, it may just be a temporary anomaly caused by data quirks and not a real setback. He said that the overall inflation rate is influenced by the prices of several items, such as used cars, airfares, and fees for portfolio management, all of which are subject to big swings in price.
According to the financial markets, central bankers have predicted that interest rates will be cut in December. There was a 70% chance of a December cut after the inflation measure was released Wednedsay, according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
"The momentum in inflation toward the Fed’s 2% target has sputtered recently but not enough, in our view, to prevent the Fed from cutting interest rates in December," wrote Ryan Sweet, Chief U.S. Economist, Oxford Economics.
Clarification for Nov. 27 2024. This article has now been updated with the clarification that PCE rose 2.3% in October over last year and 2.1% during September.
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