U.S. consumer spending surges in January; inflation accelerates

WASHINGTON (Reuters) – U.S. consumer spending rebounded sharply in January amid strong income growth, while inflation accelerated, which could add to financial markets fears that the Federal Reserve could continue raising interest rates through summer.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 1.8% last month, the Commerce Department said on Friday. Data for December was revised higher to show spending dipping 0.1% instead falling 0.2% as previously reported. Economists polled by Reuters had forecast consumer spending rebounding 1.3%.

Spending was likely driven by a 8.7% cost of living adjustment, the biggest increase since 1981, for more than 65 million Social Security beneficiaries, which boosted income. It was also probably flattered by difficulties ironing out seasonal fluctuations from the data at the start of the year. Some economists expect pay back 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 most of the loss in momentum happening in the last two months of 2022.

The strength in consumer spending, combined with a resilient labor market, suggests the economy is far from recession.

Moody’s Analytics believes the economy will experience a slowcession, where growth comes to a near-standstill but never slips into reverse.

Financial markets have been on edge since the release of January’s blockbuster employment report early this month.

The Fed is expected to deliver two additional rate hikes of 25 basis points in March and May, and financial markets are betting on another increase in June. The U.S. central bank has raised its policy rate by 450 basis points since last March from near zero to a 4.50%-4.75% range.

The personal consumption expenditures (PCE) price index shot up 0.6% last month after gaining 0.2% in December. In the 12 months through 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 increased 0.6% after climbing 0.4% in December. The so-called core PCE price index increased 4.7% on a year-on-year basis in January after advancing 4.6% in December.

The Fed tracks the PCE price indexes for monetary policy. The government reported on Thursday that inflation increased much faster than initially thought in the fourth quarter, mostly reflecting upgrades to consumer and producer price data published this month. That left some economists to expect that the road to disinflation would be slow and bumpy.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

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