Washington, U.S. consumer spending increased more than expected in January, offering the economy a strong boost at the start of the first quarter, but price pressures continued to mount, with annual inflation surging at rates last experienced four decades ago.
Growth prospects were further brightened by other data on Friday showing strong demand by businesses for equipment last month. The reports suggested strong underlying strength in the economy that could sustain the expansion as the Federal Reserve starts raising interest rates to quell inflation.
The first-rate hike from the U.S. central bank is expected next month. Economists are anticipating as many as seven rate increases this year, Reuters reports.
"Never underestimate the American consumer," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 2.1% last month after falling 0.8% in December, the Commerce Department said.
Spending was driven by purchases of motor vehicles, nondurable goods and recreational goods as well as outlays on heating amid freezing temperatures across many parts of the country. Economists polled by Reuters had forecast consumer spending rebounding 1.5%.
Consumer spending is being supported by massive savings and strong wage growth amid a tightening labor market. That is offsetting a reduction in government money to households.
Personal income was unchanged last month as a 0.5% increase in wages was offset by a decrease in government social benefits.
But high inflation is eating into wage gains. Inflation, which is well above the Fed's 2% target, could continue to spiral because of the Russia-Ukraine conflict.
Brent crude prices on Thursday soared above $100 per barrel for the first time since 2014, before retreating to about $98.7 a barrel on Friday.
According to Moody's Analytics, oil prices at $100 per barrel would shave 0.1 percentage point from GDP growth in the second quarter and slice off 0.5 percentage point in the third quarter.
INFLATION PUSHES HIGHER
The personal consumption expenditures (PCE) price index increased 0.6% in January after rising 0.5% in December.
In the 12 months through January, the PCE price index jumped 6.1%. That was the largest rise since February 1982 and followed a 5.8% year-on-year increase in December.
Excluding the volatile food and energy components, the PCE price index soared 0.5% after advancing 0.5% in December.
The so-called core PCE price index shot up 5.2% year-on-year in January, the biggest rise since April 1983. The core PCE price index increased 4.9% in the 12 months through December.
When adjusted for inflation, consumer spending jumped 1.5% in January after declining 1.3% in December.
The rebound in the so-called real consumer spending could further temper expectations for a sharp slowdown in economic growth in the first quarter.
Many economists raised their gross domestic product growth estimates for this quarter after January's robust retail sales. Growth estimates for the quarter are around a 2% annualized rate. The economy grew at a 7.0% pace in the fourth quarter.
Retail sales mostly cover the goods portion of consumer spending. The economy exited the fourth quarter with less momentum amid a resurgence in COVID-19 infections, driven by the Omicron variant.
The United States is reporting an average of 80,131 new COVID-19 infections a day, sharply down from the more than 700,000 in mid-January, according to a Reuters analysis of official data. That has increased mobility, which is expected to boost demand for services.
The economy got a lift from another report from the Commerce Department on Friday showing orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 0.9% last month.
These so-called core capital goods orders gained 0.4% in December. Economists had forecast core capital goods orders rising 0.5%. Shipments of core capital goods accelerated 1.9% last month after increasing 1.6% in December.
Core capital goods shipments are used to calculate equipment spending in the GDP measurement.
Business spending on equipment rebounded in the fourth quarter after being weighed down by motor vehicle shortages in the July-September quarter. A global shortage of semiconductors is hampering motor vehicle production.
Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, advanced 1.6% last month after rising 1.2% in December. They were boosted by a 3.4% increase in orders for transportation equipment, which followed a 1.7% rise in December.
Motor vehicle orders fell 0.4% after increasing 1.8% in December. Orders for the volatile civilian aircraft category increased 15.6% after rising 23.9% in December. Boeing reported on its website that it had received 77 aircraft orders last month compared to 80 in December.
Source: Bahrain News Agency