Moderation in personal spending amid more cooling in prices

Summary

Today's personal income and spending report shows consumers are throttling back. Not only are households spending less, but also the composition of outlays is tilting in a way that suggests a more budget-conscious mindset even as income is holding up better than first reported.

The porridge is still a bit too hot, but definitely cooling

Consumer spending lost a bit of momentum in October but continued to grow according to the latest personal income and spending report. The staying power of the consumer remains a front-of-mind consideration for Fed policymakers and financial markets alike these days amid a rising sense that the next rate adjustment could be down rather than up. It is well understood that inflation needs to be coming down closer to the Fed's target of 2% before it can initiate such a pivot. This cycle has proven that it's tough to get businesses to lower prices when consumers are still aggressively spending, that may be changing.

It is fair to say that today's report showed incremental progress on both fronts in October. Real personal spending slowed from a 0.3% increase in September to just 0.2% in October (chart). Meanwhile, the year-ago rate of core PCE inflation came down to 3.5% from 3.7% a month earlier (chart), which was expected. Headline inflation slowed to 3.0% from 3.4% the month prior, and this was a bit more of a cooling than was expected.

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