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Consumer spending is staying resilient even though wages aren’t keeping up with elevated inflation, according to recent economic reports. And even with stubbornly high inflation, consumer sentiment ticked up slightly, according to the latest University of Michigan report released Friday.

Kayla Bruun, an economic analyst at Morning Consult, said she was a “little surprised” about the resilience of consumer spending in September, seeing that the firm’s internal tracking was showing consumers became more price-sensitive in August and September.

Part of the reason why consumers’ moods are not getting worse is that gasoline prices “haven’t gone way back up again,” said Bruun said. That may have consumers increasing their spending in other areas.

In Friday’s personal consumption expenditure report by the Commerce Department, prices of goods fell in September, driven by a decline in gasoline and other energy prices.

Prices of services, which makes up a bigger part of the U.S. economy, more than offset the retreat in goods prices. And the services inflation, which includes such things as rent, tend to be stickier, in that prices for services aren’t likely to fall the way gasoline prices can.

Even factoring in inflation, real PCE still had some positive growth. The strong labor market is helping to drive consumer spending, Bruun said. “Employees are getting raises and this is keeping spending going,” she said. However, overall, wages aren’t keeping up with the rate of inflation. That means consumers’ purchasing power is eroding.

Spending at a rate that’s higher than wages are rising shows that consumers are tapping into savings, Tim Mahedy, senior director, Office of the Chief Economist at KPMG LLP said in a recent article.. That’s pushed the saving rate down to 3.1%, its lowest level since the eve of the Global Financial Crisis, he said.

That buoyant spending may be good for retailers this holiday season, but it implies that the Federal Reserve will have to stay on its aggressive hiking path in its effort to combat inflation.

José Torres, senior economist at Interactive Brokers, doesn’t see inflation coming down in the near term. “If you’ve been paying attention at the pump, gasoline prices are up meaningfully in October from September which implies future inflation data could be discouraging,” he said. “The combination of stubborn inflation in the services sector and goods ex-energy combined with the current increase in gasoline prices is a considerable setback in the Fed’s inflation battle.”

With core PCE Price Index still more than 2.5x the Federal Reserve’s 2% target in September, “I believe it implies that Fed Chairman Jerome Powell will need to remain an inflation hawk and as his battle against high prices escalates, the likelihood of a recession, rather than a soft landing, increases,” he said.

The Q3 Employment Cost Index also came out on Friday, with a 1.2% increase from Q2, in line with consensus, and slightly slower than the 1.3% increase in the prior quarter.

“While wage pressures remain high, there are some signs that they may be cooling,” KPMG’s Mahedy said. “Today’s data affirm the likelihood of the Fed’s hiking rates another ¾ percentage point next week.”

While Q3 GDP showed a rebound in economic activity, most of that’s due to the narrowing in the trade balance. That’s not expected to continue given the headwinds of a strong U.S. dollar.

“Sluggish inflation-adjusted disposable income growth and another drop in the saving rate suggest that consumer spending could ease further in the fourth quarter,” Mahedy said. “Those shifts with additional rate hikes are expected to push the economy into recession by the turn of the year.”

We’ll find out next Wednesday if the Fed gives any indications for its future rate hikes when it makes its latest rate decision. Markets are pricing in a 75 basis point increase for the November 1-2 meeting, and favoring a 50-bp hike for December. There’s still a significant chance, 44.2%, that the central bank could stay with a 75-bp hike in the December meeting, according to the CME FedWatch tool.

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