By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending slowed in October as the hurricane-related boost to motor vehicle purchases faded, while a sustained increase in underlying price pressures suggested that a recent disinflationary trend had probably run its course.
Other data on Thursday showed a second straight weekly drop in first-time applications for unemployment benefits, pointing to a further tightening in labor market conditions that could soon generate faster wage growth and keep consumer spending supported, as well as push inflation higher.
The reports strengthened expectations that the Federal Reserve will raise interest rates next month. The U.S. central bank has increased borrowing costs twice this year.
"Today's number should support the case of the hawks and centrists heading into the next Fed meeting in two weeks' time," said Michael Feroli, an economist at JPMorgan (NYSE:JPM) in New York.
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.3 percent last month after surging 0.9 percent in September. Last month's increase in consumer spending was in line with economists' expectations.
The jump in spending in September was the largest since August 2009 and was spurred by some drivers in Texas and Florida replacing automobiles destroyed when Hurricanes Harvey and Irma slammed the states in late August and early September.
Spending on long-lasting goods like autos fell 0.1 percent last month after accelerating 2.9 percent in September. Spending on nondurable goods such as prescription drugs and recreational items rose 0.2 percent. Outlays on services increased 0.3 percent amid a rise in airline tickets for foreign travel and communication services.
Though overall inflation subsided as disruptions to the supply chain following the hurricanes eased, underlying price pressures increased again at a steady clip in October.
The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, rose 0.2 percent in October after a similar gain in September. The so-called core PCE increased 1.4 percent in the 12 months through October, matching September's rise.
The core PCE has undershot the Fed's 2 percent target for nearly 5-1/2 years. Fed Chair Janet Yellen told lawmakers on Wednesday that she believed the recent weak inflation readings likely reflected "transitory factors," but also acknowledged the low inflation rates "could reflect something more persistent."
WORST IS OVER
"It looks like the worst is over for this latest idiosyncratic downdraft in core consumer inflation since the start of the year, and that Yellen was right to stick with her guns and maintain that low inflation is a transitory phenomenon," said Chris Rupkey, chief economist at MUFG in New York.
The dollar fell against a basket of currencies, while prices for U.S. Treasuries edged down. Stocks on Wall Street were trading higher, with the blue-chip Dow Jones industrial average index racing past the 24,000 mark for the first time.
With underlying inflation rising last month, so-called real consumer spending edged up 0.1 percent after increasing 0.5 percent in September. The weak real consumer spending prompted economists to lower their fourth-quarter gross domestic product growth estimates by as much as two-tenths of a percentage point to as low as a 2.2 percent annualized rate.
Growth estimates for the fourth quarter have been lowered this week from around a 3 percent pace in the wake of data showing a large goods trade deficit in October and declines in wholesale and retail inventories. The economy grew at a 3.3 percent rate in the third quarter, the fastest in three years.
Households are dipping into savings to maintain spending amid moderate wage growth. Personal income rose 0.4 percent last month after advancing by the same margin in September.
Wages increased 0.3 percent last month following September's 0.5 percent gain. While savings climbed to $457.3 billion last month from a more than nine-year low of $429.9 billion in September, they remained well below levels seen early this year.
The saving rate increased to 3.2 percent after falling to 3.0 percent in September, which was the lowest since December 2007.
"The 'savings dip' will limit the upside to consumer spending growth in the fourth quarter," said Gregory Daco, chief U.S. economist at Oxford Economics in New York.
There are, however, expectations that wage growth will accelerate as the labor market tightens further. In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 238,000 for the week ended Nov. 25.
Last week marked the 143rd consecutive week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970, when the labor market was smaller. The labor market is near full employment, with the jobless rate at a 17-year low of 4.1 percent.