U.S. consumer spending fell for a second straight month in December, putting the economy on a lower growth path heading into 2023. Meanwhile inflation continued to subside, which could give the Federal Reserve room to further slow the pace of interest rate hikes.
Friday’s report from the Commerce Department showed that prices rose 5% last month from a year earlier, down from a 5.5% year-over-year increase in November. It was the third straight drop. Higher borrowing costs may have made consumers reluctant to buy motor vehicles, recreational goods and household furniture and equipment which are typically bought on credit.
If consumers remain less willing to spend, companies’ profit margins will shrink, and many may cut expenses, which could eventually lead to layoffs. But frugal consumers can also help reduce inflation since companies can’t keep raising prices if shoppers won’t accept the higher costs.
The pullback in consumer spending will likely be welcomed by Fed officials, who are seeking to cool the economy by making lending increasingly expensive. Still, the decline in year-over-year inflation matches the Fed’s outlook and isn’t likely to alter expectations that the central bank will raise its key rate by a quarter-point next week.