US consumer spending makes biggest gain in nearly two years; inflation is picking up

WASHINGTON, Feb. 24 (Reuters) – US consumer spending rose at its strongest in nearly two years in January amid a surge in wage increases as inflation accelerated, adding to fears in financial markets that the Federal Reserve Reserve rates could continue to raise in the summer.

The Commerce Department report on Friday was the latest indication that the economy was nowhere near a feared recession. It joined data earlier this month showing robust job growth in January and the lowest unemployment rate in more than 53 years.

“Clearly, tighter monetary policy won’t fully affect consumers just yet, and it shows that the Fed has more work to do to slow aggregate demand,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “This report almost certainly assures that the Fed will continue its rate hike campaign for much longer than markets expected a few weeks ago.”

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 1.8% last month. That was the biggest increase since March 2021. Data for December was revised higher to show that spending was down 0.1% instead of 0.2% as previously reported. Economists polled by Reuters had forecast consumer spending to rise 1.3%.

Adjusted for inflation, consumer spending rose by 1.1%, also the largest increase since March 2021. So-called real consumer spending had fallen in November and December.

Consumers drove the purchase of durable manufactured goods, such as motor vehicles, household furniture and equipment, as well as recreational goods and vehicles. They also bought clothes. Expenditure on goods recovered by 2.8%. Services spending was also strong, rising 1.3% as Americans visited restaurants and bars. There were increases in expenditure on health care, recreation and transportation.

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 beneficiaries offset a decline in government social benefits. This reflected the end of the extended child tax credit.

Spending was also likely flattered by difficulties smoothing out seasonal fluctuations from early-year data. Some economists expect payback in February.

Nevertheless, the strong performance put consumer spending on a higher growth path at the start of the first quarter. Consumer spending slowed in the fourth quarter, with the biggest loss of momentum occurring in the last two months of 2022.

The data, along with another report from the Department of Commerce that showed new home sales rose 7.2% in January, led Goldman Sachs to raise its estimate for tracking gross domestic product for the first quarter by increase by 0.4 percentage point to a rate of 1.8% on an annual basis. The economy grew by 2.7% in the fourth quarter.

Stocks on Wall Street fell. The dollar strengthened against a basket of currencies. US Treasury yields rose.

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Financial markets have been tense since the release of January’s blockbuster employment report.

The Fed is expected to make two additional rate hikes of 25 basis points in March and May. Traders raised their stakes on Friday for another increase in June. The US Federal Reserve has raised its policy rate by 450 basis points since last March from near zero to a range of 4.50%-4.75%.

The personal consumption expenditure (PCE) price index shot up 0.6% last month, the biggest increase since June 2022, after rising 0.2% in December. In the 12 months through January, the PCE price index accelerated by 5.4% after rising 5.3% in December.

Excluding the volatile food and energy components, the PCE price index increased by 0.6%. That was the biggest gain since August 2022 and followed a 0.4% increase in December. The so-called core PCE price index rose 4.7% year-on-year in January, following a 4.6% increase in December.

The Fed tracks PCE price indices 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 consumer and producer price appreciations in annual revisions released this month. Entrepreneurs also push through price increases at the beginning of the year. The latest highs led economists to suspect that the road to disinflation would be slow and bumpy, with a study from the University of Michigan on Friday showing that consumer near-term inflation expectations rose in February.

But some believe year-over-year PCE price data will be revised lower when the Department of Commerce’s Bureau of Economic Analysis (BEA) releases its annual revisions to the series later this year. The year-over-year CPI and PPI data were not affected by the annual review.

“But so far, PCE price data only gets the upward revision of the annual revisions to the underlying source data over the past few months, without the compensating downward revisions of previous months,” said Daniel Silver, an economist at JPMorgan in New York. “This means that year-ago figures for PCE price data for the past few months are currently ‘too high’ and will likely be revised in the BEA’s own annual review in the fall.”

Personal income rose a solid 0.6%, most of it coming from strong wage growth. Household income adjusted for inflation increased by 1.4%, the largest increase since March 2021. Disposable income was also boosted by a 7.9% decrease in tax payments.

Consumers started saving more while spending more. The savings rate rose from 4.5% in December to 4.7%, the highest in a year.

“Households are absorbing excess savings more slowly than before, likely due to recession concerns,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

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