More good news for economy watchers looking for signs of strength going into the national shopping season.
U.S. consumer spending rose more than expected in September. American households bought more cars, and inflation increased steadily. All in, consumer spending, which is 70 percent of U.S. economic activity, increased 0.5 percent in September after a slight 0.1 percent stumble in August. That looks like a solid handoff into the holiday season, according to economists, and yet another indication that the Fed will likely raise the interest rate by the end of 2016.
The reports come out ahead of the Fed’s next meeting on the subject on Tuesday (Nov. 1) — a week before the presidential election. That quirk in timing makes it unlikely the Fed will drop a raise but recent developments make it look increasingly likely an increase will happen during its December meeting.
“The latest data should be of comfort to the Fed. Spending continues to underpin growth and, combined with positive developments on the labor market and inflation, should enable the Fed to tighten policy in December,” said Greg Daco, head of U.S. macroeconomics at Oxford Economics in New York.
Economists had forecast consumer spending rising 0.4 percent last month. Adjusted for inflation, consumer spending rose 0.3 percent after falling 0.2 percent in August.
Consumer spending increased at a 2.1 percent annual pace after advancing at a robust 4.3 percent rate in the prior period.
In more positive signs, shortages in the labor market have pushed up wages, which support both increased consumer spending and inflation. The personal consumption expenditures (PCE) price index increased 0.2 percent after a similar gain in August.
In the 12 months through September, the PCE price index rose 1.2 percent, the biggest gain since Nov. 2014, after advancing 1 percent in August.
The core PCE is the Fed’s preferred inflation measure and is running below its 2 percent target.
“Overall inflation is accelerating as energy prices and the U.S. dollar have stabilized since the spring. Stronger wage growth from the tight labor market will also help push up inflation over the medium term,” said Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh.