U.S. consumer spending recorded its biggest increase in more than six years in April as households stepped up purchases of automobiles, suggesting an acceleration in economic growth that could persuade the Federal Reserve to raise interest rates soon.
Though other data on Tuesday showed an ebb in consumer confidence in May, spending is likely to remain supported by strong gains in house prices, as well as a strengthening labor market, which is steadily pushing up wages.
“This takes the Fed a step and a half closer to the next increase in interest rates,” said John Ryding, chief economist at RDQ Economics in New York.
Fed Chair Janet Yellen said on Friday an interest rate hike would probably be appropriate in the “coming months,” if the economy continued to pick up and the labor market added jobs. Her views were similar to those expressed in minutes from the Fed’s April 26-27 policy meeting published recently.
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 1.0 percent last month as households bought a range of goods and services.
Last month’s increase was the largest since August 2009 and beat economists’ expectations for a 0.7 percent rise.
Strong consumption lifted inflation last month. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.2 percent after edging up 0.1 percent in March. That left the increase in the year-on-year core PCE rate at 1.6 percent.
The core PCE is the Fed’s preferred inflation measure and is running below its 2 percent target. Economists expect inflation to continue creeping higher this year, citing the dollar’s fading rally and a gradual increase in oil prices and wages.
Financial markets are pricing in a roughly 61 percent chance of an interest rate increase at the July 26-27 Fed policy meeting, according to CME FedWatch. The dollar was trading higher against a basket of currencies, while U.S. stocks fell. Prices for U.S. government debt were little changed.