WASHINGTON – U.S. consumers boosted their spending again in October, while their incomes increased at the fastest clip in six months. A key gauge of inflation watched by the Federal Reserve posted the fastest 12-month gain in two years.
Consumer spending increased 0.3 per cent in October after a revised 0.7 per cent jump in September, the Commerce Department said Wednesday. Incomes increased 0.6 per cent, the best showing since April.
An inflation gauge closely followed by the Federal Reserve increased 1.4 per cent compared to a year ago. That was the fastest 12-month advance since 2014. The rise was still below the Fed’s 2 per cent target, but with inflation firming, the Fed is expected to boost a key interest rate next month.
The inflation gain marked the strongest pace since prices had risen 1.5 per cent for the 12 months ending in October 2014.
“These readings continue to move closer to the Fed’s 2 per cent target,” said Gregory Daco, senior economist at Oxford Economics.
He predicted inflation would begin to run above 2 per cent early next year, influenced in part by President-elect Donald Trump’s policies to boost spending and cut taxes.
Because of this, Daco predicted the Fed would be pushed to a slightly faster pace for raising interest rates. He forecast two rate hikes in 2017 and three in 2018.
The 12-month increase in the Fed’s preferred inflation target was a tiny 0.3 per cent a year ago. That reflected a period when oil prices were plunging. The absence of inflationary pressures has been a key reason the Fed has been slow to boost its benchmark interest rate.
The central bank is widely expected to increase the rate by a quarter-point at its December meeting, a year after it raised rates for the first time in nearly a decade.
With incomes rising faster than spending, the saving rate jumped to 6 per cent in October, up from 5.7 per cent in September.
The rise in spending reflected a 1 per cent increase in purchases of durable goods such as autos and a 1.4 per cent rise in spending on nondurable goods. Spending on services such as doctor’s visits and utilities fell by 0.2 per cent in October.
Spending is closely watched since it accounts for more than two-thirds of economic activity. The overall economy grew at a solid 3.2 per cent rate in the July-September quarter. Analysts believe growth will slow to around 2 per cent in the current quarter.
This headline on this story has been corrected to show that the latest consumer spending report was for October, not September.