Consumers Entered The Holidays With A Bit Of Extra Cash

U.S. households went into the holidays with a bit more cash in their pockets than forecasters had expected despite an uptick in inflation in October.

That’s according to a report Wednesday from the Bureau of Economic Analysis on personal income and expenditures. The report showed that personal income rose 0.6% over the month, the biggest jump since March.

The increase was double the 0.3% that forecasters had expected, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. The same report showed inflation, as measured by the Personal Consumption Expenditures (PCE) price index, rose 2.3% over the year ending in October, up from 2.1% in September and in line with forecasts.

Household budgets gained ground in October in the tug-of-war between pay raises and price increases that determine buying power. Inflation-adjusted after-tax income rose 0.4%, the highest since January, after staying flat all summer and rising just 0.1% in September.

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. Economist at BMO Capital Markets.

What Does The PCE Report Mean For the Fed?

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.

The Fed had jacked up its key interest rate to a two-decade high after the pandemic, holding it there until September in an effort to cool the economy. 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.

The October inflation report showed inflation moving higher, but that may be more of a temporary blip caused by quirks in the data rather than a genuine setback, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a commentary. The overall inflation rate was pushed up by prices for several things that are prone to large swings up and down, including used cars, airline tickets, and portfolio management fees, which tend to increase when the stock market does well, he said.

Financial markets were betting the Fed will still cut interest rates in December, as central bankers predicted they would in their most recent round of economic projections. 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 and Oxford Economics.

Clarification, Nov. 27, 2024: This article has been updated to clarify that the PCE price index rose 2.3% year-over-year in October and 2.1% year-over-year in September.