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US consumer spending slows; inflation pushes higher

Surge in inflation raises the possibility of an interest rate increase from Fed Reserve this month

Dollar, US, $, Inflation
Reuters Washington
Last Updated : Mar 01 2017 | 9:04 PM IST

US consumer spending rose less than expected in January as the largest monthly increase in inflation in four years eroded households' purchasing power, pointing to moderate economic growth in the first quarter.

The surge in inflation raises the possibility of an interest rate increase from the Federal Reserve this month. While still below the US central bank's two per cent target, inflation is now in the upper end of the range that Fed officials in December felt would be reached this year.

The Commerce Department said on Wednesday that consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.2 per cent after rising 0.5 per cent in December. Economists polled by Reuters had forecast consumer spending gaining 0.3 per cent in January.

Consumer spending is likely to remain supported amid promises by the Trump administration of sweeping tax cuts and increased infrastructure spending.

In a speech to Congress on Tuesday night, President Donald Trump said his economic team was working on a "historic tax reform that will reduce the tax rate on our companies" and promised a "massive" tax relief for the middle class. Trump offered no further details.

Consumer confidence has surged following Trump's election victory, hitting a 15 and half year high in February.

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In January the personal consumption expenditures (PCE) price index increased 0.4 per cent - the largest gain since February 2013 - after rising 0.2 per cent in December.

In the 12 months through January, the PCE price index jumped 1.9 per cent. That was the biggest year-on-year gain since October 2012 and followed a 1.6 per cent increase in December.

Excluding food and energy, the so-called core PCE price index rose 0.3 per cent in January. That was the biggest increase since January 2012 and followed a 0.1 per cent gain in December.

The core PCE price index increased 1.7 per cent year-on-year after a similar gain in December. The core PCE is the Fed's preferred inflation measure.

Prices for US Treasuries fell, with the yield on the interest-rate sensitive two-year note rising to its highest level since August 2009. Fed funds futures were pricing in a 65 per cent chance of an interest rate hike at the Fed's March 14-15 policy meeting.

The US central bank has forecast three rate increases this year. The Fed hiked its overnight interest rate last December by 25 basis points to a range of 0.50 per cent to 0.75 per cent.

The dollar rose against a basket of currencies, while US stock index futures pared gains slightly.

REAL SPENDING FALLS

Rising price pressures, however, suggest that consumer spending will probably not provide a big boost to gross domestic product in the first quarter. When adjusted for inflation, consumer spending fell 0.3 per cent in January, the first drop since August and the biggest in three years. Real consumer spending increased 0.3 per cent in December.

Consumer spending increased at a three per cent annualized rate in the fourth quarter, helping to blunt some of the impact on the economy from a wider trade deficit. The economy grew at a 1.9 per cent rate in the fourth quarter.

Consumer spending in January was held back by a 0.3 per cent drop in purchases of long-lasting manufactured goods such as automobiles. Spending on services was unchanged.

Personal income rose 0.4 per cent in January after gaining 0.3 per cent in December. Wages and salaries rose 0.4 per cent.

Income at the disposal of households after accounting for inflation and taxes, fell 0.2 per cent, the first decline since October 2013. Savings increased to $795.7 billion in January from $779.5 billion in December

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First Published: Mar 01 2017 | 9:00 PM IST

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