US consumer spending better than anticipated as inflation hots up

Federal Reserve chairman Jerome Powell. The latest hot inflation print further validates Fed officials’ calls to begin raising interest rates at their March policy meeting and could potentially lend support to a half percentage-point hike, rather than a quarter-point.

US inflation-adjusted consumer spending advanced by more than expected in January, highlighting the resilience of American demand despite a surge in Covid-19 cases and prices rising by triple the Federal Reserve’s target.

Purchases of goods and services, adjusted for changes in prices, increased 1.5% from December, the US Commerce Department said.

The personal consumption expenditures price index, which the Fed uses for its inflation target, increased 0.6% from a month earlier and 6.1% from January 2021, the most since 1982. Unadjusted for inflation, spending rose 2.1% from December, while incomes were little changed.

The report underscores the robustness of consumer demand and reflects the temporary, but relatively subdued, impact from the omicron wave on outlays. Declining Covid-19 cases and an improving labour market should support spending in the months ahead, especially for services, but inflation - which is expected to increase further in the near term - remains a headwind.

Higher prices for necessities like food and gasoline mean Americans have less money to spend on discretionary items and services.

The latest hot inflation print further validates Fed officials’ calls to begin raising interest rates at their March policy meeting and could potentially lend support to a half percentage-point hike, rather than a quarter-point.

- Bloomberg