US consumers ignore rising inflation, relying on savings to boost spending

Shoppers browse a supermarket in North St. Louis, Missouri, US, April 4, 2020. REUTERS/Lawrence Bryant/File Photo

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  • Consumer spending increased 1.1% in March
  • PCE price index jumps 0.9%; 6.6% increase year over year
  • Core PCE gains 0.3%; Increases 5.2% YoY
  • Employment cost index rose 1.4% in the first quarter

WASHINGTON (Reuters) – US consumer spending rose more-than-expected in March amid strong demand for services, while monthly inflation rose by the most in 16-1/2 years, giving the Federal Reserve ammunition to raise interest rates by a significant amount. 50 basis points next week.

The case for the US central bank’s aggressive monetary policy stance was also boosted by other data on Friday showing US workers’ compensation posting its biggest increase in more than three decades in the first quarter. Companies are raising wages in a desperate attempt to attract scarce workers.

Strong consumer spending heading into the second quarter of the year has allayed fears of a recession after the economy unexpectedly contracted in the first three months of the year.

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“There is nothing about to go wrong in an economy where the consumer is still encouraging his way to prosperity,” said Christopher Robke, chief economist at FWDBONDS in New York. “There is no recession in sight yet.”

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, rose 1.1% last month. February data was revised higher to show expenditures rising 0.6% instead of 0.2% as previously reported.

Spending on services increased 1.1%, supported by demand for international travel and dining out at restaurants as well as hotel stays. There were also increases in spending on health care and expenditures on entertainment and transportation services.

Spending on goods increased by 1.2%, mostly reflecting gasoline and other energy products, as well as foodstuffs, the prices of which rose sharply. Spending on long-term goods such as cars fell for the second month in a row due to the shortage.

Economists polled by Reuters had expected consumer spending to increase 0.7 percent. Even as prices skyrocketed, inflation-adjusted consumer spending posted a 0.2% gain last month, highlighting the underlying strength of the economy in an increasingly volatile environment.

The data was included in Thursday’s first-quarter GDP report, which showed the economy contracted at an annualized rate of 1.4% due to a wider trade deficit. This was due to higher imports, and a slower pace of inventory build-up compared to the strong rate for the fourth quarter. Consumer spending rebounded last quarter, combined with business investment to boost domestic demand. Read more

Stocks fell on Wall Street. The dollar fell against a basket of currencies. US Treasury yields rose.

personal consumption

Peak swell?

The personal consumption expenditures (PCE) price index jumped 0.9% in March, the largest increase since September 2005, after rising 0.5% in February. In the 12 months through March, the PCE price index jumped 6.6%, the largest rise since January 1982, after rising 6.3% in February.

However, March will likely have seen the peak in this price index. Economists expect the increase in the annual PCE price index to begin to slow, excluding last year’s big gains. In addition, the shift in spending on services from goods relieves pressure on supply chains.

Excluding the volatile food and energy components, the PCE price index rose 0.3% after a similar gain in February. The so-called core PCE price index rose 5.2% year over year in March after accelerating 5.3% in February.

economic inflation

By all accounts, annual inflation has exceeded the Fed’s 2% target and the central bank is expected to raise interest rates by half a percentage point next Wednesday. The Fed raised its policy rate by 25 basis points in March and is likely to soon begin reducing its asset holdings.

Even if inflation peaks, it may remain uncomfortably high for a while. A separate report from the Labor Department on Friday showed that the employment cost index, the broadest measure of labor costs, jumped 1.4% in the first quarter after advancing 1.0% in the October-December period.

Labor costs rose 4.5% year over year, the largest increase since 2001, after a 4.0% increase in the fourth quarter.

The ECI is widely viewed by policy makers as one of the best measures of slack in the labor market and an indicator of core inflation because it adjusts to changes in composition and job quality.

As compensation costs from an overheating labor market are a more consistent source of inflation and more within the Fed’s purview, today’s report increases the chance of a 50-point rate hike in upcoming meetings, starting with the week’s meeting, said Sarah House, a senior official. next”. Economist at Wells Fargo in Charlotte, North Carolina.

There were approximately 11.3 million jobs at the end of February.

Wages and salaries rose 1.2% last quarter after rising 1.0% in the fourth quarter. It is up 4.7% year over year. But rising inflation has eroded employee earnings. Inflation-adjusted wages fell 3.6% year over year.

Interest jumped 1.8%, the most in 18 years, after rising 0.9% in the first quarter from October to December.

Labor costs

With inflation decimating offsetting gains, consumers are tapping into savings to fund their spending, which some have said indicates a slowdown in consumption is looming.

The savings rate fell to 6.2%, the lowest since December 2013, from 6.8% in February. Consumers have accumulated more than $2 trillion in excess savings during the pandemic.

“Rising prices are undermining the true value of these savings,” said Andrew Hollenhurst, chief US economist at Citigroup in New York. “Real income excluding transfer payments is basically flat over the past six months which means either wages need to accelerate more or real consumption will continue to slow.”

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(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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