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US consumer spending slows, but inflation is rising

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WASHINGTON: US consumer spending barely rose in February amid delays in the payment of income tax refunds, but the biggest annual increase in inflation in nearly five years supported expectations of further interest rate hikes this year.


The slowdown in consumer spending reported by the Commerce Department on Friday is, however, likely to be temporary with consumer confidence at a more than 16-year high and a tightening labour market pushing up wage growth.


“Given the weather-related weakness in utilities spending as well as some delays in tax refunds for low-and middle-income earners in February, we expect consumer spending to strengthen in the quarters ahead,” said Eugenio Aleman, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.


The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1 per cent. That was the smallest gain since August and followed an unrevised 0.2 per cent rise in January.


Economists had expected a 0.2 per cent increase. The government delayed the issuing of tax refunds this year as part of efforts to combat fraud.


Spending last month was held back by a 0.1 per cent dip in purchases of big-ticket items like automobiles. While unseasonably warm weather lowered households’ heating bills, it restricted spending growth last month.


Weak consumer spending resulted in the Atlanta Federal Reserve trimming its first-quarter economic growth estimate by one-tenth of a percentage point to a 0.9 per cent annualized rate. Gross domestic product increased at a 2.1 per cent rate in the fourth quarter, stepping down from the July-September quarter’s brisk 3.5 per cent pace.


Despite signs of moderate growth, economists expect the Federal Reserve will raise interest rates at least twice more this year. The US central bank raised its benchmark overnight interest rates by a quarter of a percentage point this month.


Other data on Friday showed the University of Michigan’s consumer sentiment index slipping to a reading of 96.9 in March from 97.6 earlier in the month. The final reading was a touch higher than February’s 96.3. A report from the Conference Board this week showed its consumer confidence index surging in March to its highest reading since December 2000.


The dollar was trading slightly higher against a basket of currencies, while US stocks fell on Friday, pulled down by Exxon and JPMorgan Chase as investors wrapped up a strong quarter and weighed whether corporate earnings reports will justify the market’s lofty valuations.


Major indexes have hit multiple record highs since the election of President Donald Trump on bets that he would improve economic growth by cutting taxes and boosting infrastructure spending. The rally has also benefited from robust economic data and a pickup in corporate earnings growth.


For the quarter ending on Friday, the S&P 500 gained 5.5 per cent, its strongest quarterly performance since the last quarter of 2015.


Investors are now looking to the upcoming quarterly earnings season to justify pricy valuations.


First-quarter earnings for S&P 500 companies are expected to rise 10.1 per cent, according to Thomson Reuters I/B/E/S. The index is trading at about 18 times earnings estimates for the next 12 months, compared to its long-term average of 15.


INFLATION PRESSURES BUILDING:  Even with economic growth slowing at the start of the year, inflation is rising. The personal consumption expenditures (PCE) price index gained 0.1 per cent last month after jumping 0.4 per cent in January.


That lifted the year-on-year rate of increase in the PCE price index to 2.1 per cent, the biggest gain since April 2012. The PCE price index rose 1.9 per cent in January.


Excluding food and energy, the so-called core PCE price index increased 0.2 per cent last month after rising 0.3 per cent in January. In the 12 months through February, the core PCE price index increased 1.8 per cent after a similar gain in January.


The core PCE is the Federal Reserve’s preferred inflation measure and is running below its 2 per cent target. Inflation is now in the upper end of the range that Fed officials in March felt would be reached this year.


“There is nothing in this report that suggests the Fed should pause in June in its gradual renormalization of monetary policy but the Fed will look closely at the evolution of core inflation over the next two months in making that decision,” said John Ryding, Chief Economist at RDQ Economics in New York.


Rising price pressures are also eating into consumer spending. When adjusted for inflation, consumer spending fell 0.1 per cent in February after declining 0.2 per cent in January.


That was the first back-to-back monthly decline in real consumer spending since April 2009. Personal income rose 0.4 per cent last month after advancing 0.5 per cent in January. Wages increased 0.5 per cent, the biggest gain in five months.


Income at the disposal of households after accounting for inflation increased 0.2 per cent after dipping 0.1 per cent in January. Savings rose to a five-month high of $808.0 billion from $770.9 billion in January.  Rising incomes and higher savings bode well for future consumer spending. — Reuters


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