U.S. consumer spending rose less than expected in January as the largest monthly increase in inflation in four years eroded households’ purchasing power, pointing to moderate economic growth in the first quarter.
The surge in inflation raises the possibility of an interest rate increase from the Federal Reserve this month. While still below the U.S. central bank’s 2 percent target, inflation is now in the upper end of the range that Fed officials in December felt would be reached this year.
Despite the signs of moderate economic growth early in the first quarter, the recovery in the manufacturing sector is gaining traction, with factory activity surging to a 2-1/2-year high in February, other data showed on Wednesday.
“It would appear to suggest the economy is getting off to yet another abysmal start to a year in the first quarter,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. “Core inflation is gradually closing in on target, which partly explains why Fed officials appear to be making the case for a March interest rate hike.”
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2 percent after rising 0.5 percent in December. Economists polled by Reuters had forecast consumer spending gaining 0.3 percent in January.
Consumer spending is likely to remain supported amid promises by the Trump administration of sweeping tax cuts and increased infrastructure spending.
In a speech to Congress on Tuesday night, President Donald Trump said his economic team was working on a “historic tax reform that will reduce the tax rate on our companies” and promised a “massive” tax relief for the middle class. Trump offered no further details.
Consumer confidence has surged following Trump’s election victory, hitting a 15-1/2-year high in February.
In January the personal consumption expenditures (PCE) price index increased 0.4 percent – the largest gain since February 2013 – after rising 0.2 percent in December.
In the 12 months through January, the PCE price index jumped 1.9 percent. That was the biggest year-on-year gain since October 2012 and followed a 1.6 percent increase in December.