American households experienced mounting financial pressure in the months of October and November, as a new government report indicates that earnings did not keep pace with the escalating cost of living. This trend highlights a challenging economic environment for many.
According to data released by the Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) price index, a key inflation gauge, registered an annual increase of 2.8% in November, slightly up from October's 2.7%. When excluding volatile food and energy costs, the "core" PCE index maintained the same elevated level as September. Simultaneously, inflation-adjusted disposable income saw a marginal decline of 0.1% in October before a modest 0.1% rise in November. Consequently, the personal savings rate reached its lowest point since 2022, falling to 3.5% in November from 4% in September.
This report reinforces earlier economic patterns observed throughout the year, characterized by an inflation rate that continues to exceed the Federal Reserve's 2% annual target. This persistent inflation has made it difficult for household incomes to maintain purchasing power. The collection of this data was notably delayed by approximately one month due to a government shutdown during October and November. This interruption not only placed additional financial burdens on federal employees but may also have introduced distortions into the survey's findings. Economists, including Heather Long from Navy Federal Credit Union, have pointed out that while consumers are still spending, they heavily drew upon their savings during the shutdown. Long emphasized the importance of continued income growth in 2026 for a healthy economy and urged close monitoring of these trends, especially given the potential impact of the shutdown on the data.
The savings rate has been on a consistent downward trajectory since April, a period coinciding with President Donald Trump's announcement of widespread tariffs. Although these tariffs were eventually scaled back, they, alongside other trade policies, have contributed to economic uncertainty and upward pressure on consumer prices. The elevated core inflation figures, though potentially influenced by the shutdown, remain a critical indicator for the Federal Reserve. The central bank prioritizes core PCE as its primary benchmark for assessing inflation, as it excludes the often unpredictable fluctuations in food and energy prices, which can be driven by factors unrelated to broader economic trends.
The current economic climate, marked by rising costs and stagnant real incomes, puts considerable strain on household budgets, particularly for those in middle and lower-income brackets. If individuals are compelled to reduce their spending, this could significantly weaken consumer expenditures, which are a fundamental pillar of economic activity. The Federal Reserve is anticipated to maintain current interest rates at its upcoming meeting. Policymakers are engaged in an ongoing discussion regarding whether to sustain higher rates to combat inflation or to reduce them to stimulate the labor market, which has shown signs of slowing. Decisions on the fed funds rate directly impact borrowing costs across various loan types; thus, keeping rates elevated tends to curb borrowing and spending, thereby cooling inflation.