U.S. consumer spending accelerated in December as households bought motor vehicles and cold weather boosted demand for utilities amid a rise in wages, pointing to sustained domestic demand that could spur economic growth in early 2017.
There are also signs that inflation firmed last month. The growth outlook was further bolstered by other data on Monday showing a jump in contracts to buy previously owned homes. A strengthening economy, rising price pressures and tightening labor market could allow the Federal Reserve to raise interest rates at least three times this year.
“Consumers keep on spending to help the economy grow and inflation is stirring,” said Chris Rupkey, chief economist at MUFG Union Bank in New York. “The economy is at full employment. Time for the Fed to hoist sail on interest rates.”
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.5 percent after gaining 0.2 percent in November. The rise was the biggest in three months and in line with economists’ expectations.
Consumer spending increased 3.8 percent in 2016 after a 3.5 percent rise in 2015. With domestic demand firming, inflation showed some signs of picking up last month. The personal consumption expenditures (PCE) price index rose 0.2 percent after edging up 0.1 percent in November.
In the 12 months through December the PCE price index advanced 1.6 percent, the biggest increase since September 2014. That followed a 1.4 percent increase in November.
Excluding food and energy, the so-called core PCE price index ticked up 0.1 percent after being unchanged in November. The core PCE price index increased 1.7 percent on a year-on-year basis after a similar gain in November.
The core PCE is the Fed’s preferred inflation measure and is running below its 2 percent target. However, other inflation measures are above the PCE price indexes. The consumer price index (CPI) is currently at 2.1 percent on a year-on-year basis and the core CPI is up 2.2 percent.
“Inflation will gradually accelerate over the next couple of years due to higher energy prices and stronger wage growth that leads firms to raise prices,” said Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh.