- Consumer spending rises 1.8% in January
- Income up 0.6%; Wages up 0.9%
- Core PCE Price Index up 0.6%; 4.7% more than in the previous year
WASHINGTON, Feb 24 (Portal) – US consumer spending rose by the fastest pace in almost two years in January amid a surge in wage growth, while inflation accelerated, fueling fears in financial markets that the Federal Reserve would cut interest rates could increase further into the summer.
Friday’s Commerce Department report was the latest indication that the economy was nowhere near a much-feared recession. It followed data earlier this month that showed robust job growth in January and the lowest unemployment rate in more than 53 years.
“Clearly, tighter monetary policy has yet to fully impact consumers and shows that the Fed still needs to do more to rein in aggregate demand,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “This report is almost reassuring that the Fed will continue its rate hike campaign for much longer than markets were expecting just a few weeks ago.”
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 1.8% over the past month. That was the biggest increase since March 2021. December data was revised upwards to show spending fell 0.1%, instead of 0.2% as previously reported. Economists polled by Portal had forecast a 1.3% rebound in consumer spending.
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Adjusted for inflation, consumer spending increased by 1.1%, also the largest increase since March 2021. So-called real consumer spending fell in November and December.
Consumers increased purchases of durable industrial goods such as automobiles, home furnishings and appliances, as well as leisure items and vehicles. They also bought clothes. Merchandise spending recovered 2.8%. Spending on services was also strong, rising 1.3% as Americans frequented restaurants and bars. There have been increases in spending on health, recreation and transportation services.
The overall increase in spending came as wages and salaries rose 0.9%. An 8.7% cost-of-living adjustment, the largest increase since 1981, for more than 65 million Social Security recipients offsets a decline in government welfare payments. This reflected the expiry of the extended child allowance.
Spending was also likely flattered by difficulties ironing out seasonal variations from data earlier in the year. Some economists expect a payback in February.
Nonetheless, the strong performance early in the first quarter led to a higher growth trajectory in consumer spending. Consumer spending slowed in the fourth quarter, with most of the loss of momentum occurring in the last two months of 2022.
The data, along with another Commerce Department report showing new home sales rose 7.2% in January, prompted Goldman Sachs to lower its estimate of gross domestic product for the first quarter by 0.4 percentage points to an annualized rate of 1 .8% increase. The economy grew 2.7% in the fourth quarter.
Wall Street stocks fell. The dollar strengthened against a basket of currencies. US Treasury yields rose.
Sale of new houses
MORE PRICE INCREASES
Financial markets have been jittery since the blockbuster jobs report was released in January.
The Fed is expected to deliver two more rate hikes of 25 basis points in March and May. Traders increased their bets on Friday for another increase in June. The US Federal Reserve has raised interest rates by 450 basis points from near zero to a range of 4.50% to 4.75% since last March.
The personal consumption expenditure (PCE) price index surged 0.6% last month, the biggest rise since June 2022, after rising 0.2% in December. In the 12 months to January, the PCE price index accelerated 5.4% after rising 5.3% in December.
Excluding the volatile food and energy components, the PCE price index rose 0.6%. That was the biggest gain since August 2022 and followed a 0.4% gain in December. The so-called core PCE price index rose 4.7% year-on-year in January after rising 4.6% in December.
The Fed tracks the PCE price indexes for monetary policy. According to economists’ calculations, prices for core non-housing services, which are closely watched by policymakers, rose 0.6% after rising 0.4% in December.
The rise in inflation reflects upgrades in consumer and producer prices in the annual revisions released this month. Companies also push through price increases at the beginning of the year. The recent high readings led economists to expect the road to disinflation would be slow and bumpy, with a University of Michigan poll on Friday showing that consumers’ near-term inflation expectations rose in February.
UMich inflation expectations
However, some believe PCE price data will be revised lower year-on-year when the Commerce Department’s Bureau of Economic Analysis (BEA) releases its annual revisions to the series later this year. Year-on-year CPI and PPI data were unaffected by the annual revision.
“But so far, the PCE price data only receives the upward revision from the annual revisions of the underlying source data for the past few months, without the offsetting downward revisions of previous months,” said Daniel Silver, an economist at JPMorgan in New York. “This means that year-on-year rates for PCE price data for recent months are currently ‘too high’ and are likely to be revised downwards in the BEA’s own annual revision in the fall.”
Personal income rose a solid 0.6%, with most of that driven by strong wage growth. Disposable income for households increased by 1.4% after adjusting for inflation, the largest increase since March 2021. Disposable income was also boosted by a 7.9% drop in tax payments.
Consumers increased their savings even as they increased their spending. The savings rate rose to 4.7%, the highest level in a year, from 4.5% in December.
“Households are withdrawing excess savings more slowly than before, likely due to recession concerns,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.
Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci
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