With prices falling and incomes rising, consumers get a break in time for Christmas
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In Friday’s personal consumption expenditures report, which is the Federal Reserve’s preferred inflation gauge, some prices actually fell in November for the first time since the spring of 2020. It also showed that disposable personal income rose last month, and the personal saving rate did too.
We all know what a difference it makes in our lives to get a raise at work or a new job that pays more. When that happens for millions of people, it makes a big difference to the economy, which is largely powered by consumer spending.
“The single most important driver of consumer spending is income,” said Charles Lieberman, chief investment officer at Advisors Capital Management. He said this latest PCE report shows that “household income is doing quite well. It’s growing faster, meaningfully faster, than inflation. And so consumers have real income growth.”
Why is income growing so much now? It’s hard to say.
“I mean, we’re going to be debating this as economists for years to come,” said Wendy Edelberg at the Brookings Institution.
For much of the last couple of years, inflation has been outpacing wage growth. “And we expected some catch-up,” Edelberg said. “We expected firms to say, ‘We need to retain our workers, we need to make sure that it’s worthwhile for them to keep these jobs.'”
Firms did that by giving them raises. The combination of those raises and inflation easing means people have more spending power and the ability to save more.
Though Ted Rossman at Bankrate said the saving rate is still low, about 4%.
“Pre-pandemic, it was in the 7s,” he said. “And in fact, most of the decade before that we were somewhere in the 5, 6, 7% range.”
Still, Rossman said there’s a lot to feel good about.
“For a while now, we’ve been saying that there’s this odd disconnect between sentiment and reality,” he said. “Even though the job market’s been good and economic growth has been good, people haven’t been feeling good about things because high inflation has been gobbling up whatever wage gains they’re making.”
But, he said, now that the trend has reversed, surveys are showing people are starting to feel better.
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