US consumer spending decreases further; inflation creeping up

WASHINGTON: U.S. consumer spending fell for a second straight month in December amid renewed business restrictions to slow the spread of COVID-19 and a temporary expiration of government-funded benefits for millions of unemployed Americans.

The report from the Commerce Department on Friday also showed inflation steadily rising last month. Expectations that inflation would perk up this year were supported by other data showing a solid increase in labor costs in the fourth quarter.

But a rise above the Federal Reserve's 2per cent target, a flexible average, is unlikely to worry policymakers. The U.S. central bank is expected to maintain its ultra-easy monetary policy stance for a while as the economy battles the pandemic. Excess capacity remains throughout the economy, which could limit companies' ability to raise prices.

"The Fed would like inflation to average 2per cent, so it would like inflation to temporarily move above 2per cent," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. "Inflation pressures will remain limited to a few sectors as high unemployment will restrain wage growth."

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slipped 0.2per cent last month as outlays at restaurants declined. Spending at hospitals also fell, likely as patients stayed away in fear of contracting the coronavirus.

Households also cut back spending on recreation. Consumer spending tumbled 0.7per cent in November. Economists polled by Reuters had forecast spending would fall 0.4per cent in December.

When adjusted for inflation, consumer spending decreased 0.6per cent last month after dropping 0.7per cent in November. That likely sets a lower base for consumer spending in the first quarter.

Another drop in January is not expected as states, including New York and California, have started easing pandemic-related restrictions. But outlays on long-lasting manufactured goods, the main driver of spending during the pandemic, fell for a second consecutive month in December. Spending on nondurable goods dropped for a third straight month. Services gained 0.1per cent.

"Goods spending has clearly rolled over, and we anticipate the pull-forward in demand in the second half of last year will also weigh on consumption of goods at the start of this year," said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "We do not anticipate spending to pick up significantly until a vaccine is widely administered."

U.S. stocks fell sharply. The dollar was steady against a basket of currencies. U.S. Treasury prices were mostly lower.

The data was included in Thursday's advance gross domestic product report for the fourth quarter, which showed the economy growing at a 4per cent annualized rate after a record 33.4per cent pace in the July-September period. Consumer spending rose at a 2.5per cent rate last quarter following a spectacular 41.0per cent growth pace in the third quarter.

Separately on Friday, the University of Michigan said its measure of consumer sentiment eased in January. A third report from the National Association of Realtors showed contracts to purchase homes decreased for a fourth straight month in December, suggesting some moderation in the housing market, one of the economy's star performers.

Growth is expected to decelerate to around a 2per cent rate in the first quarter as the economy works through the disruptions from a COVID-19 surge in the winter. Faster growth is expected by summer. The government provided nearly US$900 billion in additional relief in late December and distribution of vaccines is expected to broaden and accelerate.

President Joe Biden also has unveiled a recovery plan worth US$1.9 trillion, though the package is likely to be pared down amid worries about the nation's swelling debt.

The late December stimulus package, which included direct cash payments to some households and renewal of a US$300 unemployment supplement until March 14, helped to boost personal income, which rebounded 0.6per cent after tumbling 1.3per cent in November.

Some of the money was stashed away, boosting the saving rate to 13.7per cent from 12.9per cent in November.

Inflation crept higher. The personal consumption expenditures (PCE) price index excluding the volatile food and energy component gained 0.3per cent after being unchanged in November. In the 12 months through December, the so-called core PCE price index increased 1.5per cent after advancing 1.4per cent in November. The core PCE price index is the Fed's preferred inflation measure.

Gradually firming inflation was reinforced by a fourth report from the Labor Department showing its Employment Cost Index, the broadest measure of labor costs, rose 0.7per cent last quarter after advancing 0.5per cent in the third quarter.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation, as it adjusts for composition and job quality changes. Wages jumped 0.9per cent last quarter.

But with employment still 10 million jobs below the pre-pandemic peak, the rise is probably unsustainable. Still, inflation is seen accelerating in the months ahead as weak readings last March and April drop from the calculation.

Strengthening economic growth is also expected to boost price pressures. Bottlenecks in the supply chain are raising costs for manufacturers, and the increases are being passed on to consumers. Recent manufacturing surveys have shown a surge in price measures for both raw materials and finished products.

"Though inflation will accelerate this year, some of that will be transitory," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci)