US consumer spending slows; inflation ticks up
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 2 percent 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 yesterday that consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.2 percent after rising 0.5 percent in December. Economists polled by Reuters had forecast consumer spending gaining 0.3 percent 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 15-1/2-year high in February. In January the personal consumption expenditures (PCE) price index increased 0.4 percent the largest gain since February 2013 - after rising 0.2 percent in December.
In the 12 months through January, the PCE price index jumped 1.9 percent. That was the biggest year-on-year gain since October 2012 and followed a 1.6 percent increase in December. Excluding food and energy, the so-called core PCE price index rose 0.3 percent in January. That was the biggest increase since January 2012 and followed a 0.1 percent gain in December. The core PCE price index increased 1.7 percent 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 2-year note rising to its highest level since August 2009. Fed funds futures were pricing in a 65 percent 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 percent to 0.75 percent. The dollar rose against a basket of currencies, while US stock index futures pared gains slightly.
Real spending
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 percent in January, the first drop since August and the biggest in three years. Real consumer spending increased 0.3 percent in December. Builders cut back on construction spending in January by the largest amount in nine months, with weakness stemming from the biggest reduction in government activity in nearly 15 years.
Construction
The Commerce Department says that construction spending fell 1 percent in January. It was the first decline since September and the biggest drop since a 2.9 percent dip in April. Residential construction showed a modest gain, while private nonresidential activity was flat. However, spending on government projects tumbled 5 percent, the largest onemonth drop since March 2002. President Donald Trump wants to sharply increase spending on government infrastructure projects over the next decade. But his proposal is expected to face hurdles winning approval in Congress at a time of rising budget deficits.