The Federal Reserve's preferred inflation indicator meets expectations, with the U.S. November PCE price index rising 2.8% year-on-year and 0.2% month-on-month

On Thursday, January 22 local time, according to data from the Bureau of Economic Analysis (BEA), the inflation indicator favored by the Federal Reserve, the PCE inflation, met expectations; U.S. personal spending grew at a robust pace in November, indicating that American consumers continue to show strong resilience as the holiday shopping season begins; however, the savings rate has further declined.

The price increase in November was moderate, but the distorting effects of the longest government shutdown in U.S. history, which ended on November 12, have not fully dissipated. During the shutdown, the U.S. Bureau of Labor Statistics (BLS) was unable to collect most of the consumer price data for October. The BEA stated that in the absence of October price data, it used the geometric average of the Consumer Price Index (CPI) for September and November for estimation.

The specific inflation data is as follows, with key figures meeting expectations:

The U.S. PCE price index in November rose 2.8% year-on-year, expected at 2.8%.

The U.S. PCE price index in November rose 0.2% month-on-month, expected at 0.2%.

The core PCE price index in the U.S., excluding food and energy prices, rose 2.8% year-on-year in November, expected at 2.8%.

The core PCE price index in the U.S., excluding food and energy prices, rose 0.2% month-on-month in November, expected at 0.2%.

The U.S. core PCE price index is the preferred measure of potential inflationary pressure by the Federal Reserve, showing a slight rebound on an annualized basis compared to October.

The closely watched service sector inflation indicator, excluding energy and housing costs, rose 0.3% for the second consecutive month.

Personal Income and Consumption Expenditure

Regarding personal income and consumption expenditure:

U.S. personal income rose 0.3% month-on-month in November, expected at 0.4%.

U.S. personal consumption expenditure (PCE) rose 0.5% month-on-month in November, expected at 0.5%.

Adjusted for inflation, U.S. real personal consumption expenditure (PCE) rose 0.3% month-on-month in November, expected at 0.3%, marking the second consecutive month of a 0.3% increase.

The growth in personal spending in November was primarily driven by goods spending, which saw the strongest increase since July; spending on services, however, slowed compared to the previous month.

The report also indicated that nominal wages and salaries grew robustly by 0.4%, but after accounting for inflation, disposable income saw almost no growth.

The only exception in this data was that monthly income growth was slightly below expectations, leading to a decline in the personal savings rate. The current savings rate stands at 3.5%, the lowest level since October 2022. Although income and spending data indicate a strong start to the fourth quarter, it remains unclear how long consumers can maintain such momentum: the savings rate reflects that Americans are using more of their wage income to sustain consumption.

Earlier that day, the BEA also announced that revised U.S. GDP for the third quarter grew at an annualized rate of 4.4%, the highest level in two years; personal consumption expenditure grew at the fastest annual rate

Market Interpretation

Analysis indicates that the U.S. PCE personal consumption expenditure data released on January 22 largely met expectations, which is reflected not only in inflation indicators but also in actual nominal consumption levels. This report showed little sign of American consumers exhibiting fatigue due to ongoing concerns about the labor market and cost of living. On the contrary, the latest data suggests that personal spending continued to drive the economy in the fourth quarter, fueled by income growth.

The savings rate is at its lowest level since October 2022, which coincided with a peak in public dissatisfaction with inflation. This does not necessarily mean that consumer spending will immediately shrink, but as a general principle: the lower the savings rate before we eventually face a consumption contraction, the stronger and more jarring the impact of that contraction will be.

Citigroup economist Veronica Clark stated, “Consumption has shown surprising resilience. It is surprising because the labor market has slowed, unemployment has risen, and hiring has decreased. If labor income growth slows and the savings rate is low, I still expect consumption to cool.”

Given the statistical distortions caused by the U.S. government shutdown, Federal Reserve officials are unlikely to overinterpret this somewhat lagging inflation and economic “snapshot.” The market generally expects that after three consecutive rate cuts by the end of 2025, policymakers will maintain interest rates at the upcoming FOMC meeting next week, with many officials noting that the labor market is stabilizing and inflation risks remain.

Market Reaction

After the release of the U.S. PCE inflation data:

• The S&P 500 index maintained an increase of about 0.3%, stabilizing near the daily low.
• The yield on the U.S. 10-year Treasury bond fell to around 4.26%, with the increase narrowing to less than 2 basis points. At 22:55 Beijing time (five minutes before the release of the Fed-favored PCE inflation indicator), it had reached a daily high of 4.2747%. The two-year U.S. Treasury yield maintained an increase of over 2.3 basis points, stabilizing near the daily high of 3.6143%.
• Spot gold maintained a 0.1% increase, stabilizing below $4,840.
• The U.S. dollar index maintained a 0.2% decline, stabilizing near the daily low of 98.528 points, continuing a downward “trend” since 14:55