US consumers ramped up their spending in January, with the largest increase in nearly two years, according to the US Department of Commerce. This, coupled with a surge in wage gains and an acceleration in inflation, has caused financial markets to worry that the Federal Reserve may continue raising interest rates through summer.
The report is a clear indication that the US economy is far from a recession. It follows data from earlier this month that showed strong job growth and the lowest unemployment rate in more than 53 years. Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina, said, “Tighter monetary policy has yet to fully impact consumers and shows that the Fed has more work to do in slowing down aggregate demand. This report means that the Fed will likely continue hiking into the summer.”
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 1.8 percent last month. This was the biggest increase since March 2021 and was higher than the expected 1.3 percent increase predicted by economists. When adjusted for inflation, consumer spending increased 1.1 percent, also the biggest gain since March 2021. The increase was driven by purchases of long-lasting manufactured goods such as motor vehicles, household furnishings and equipment, as well as increased spending on dining out and recreation.
The jump in spending was likely due to a 0.9 percent increase in wages and salaries, as well as an 8.7 percent cost of living adjustment for more than 65 million Social Security beneficiaries. However, some economists believe that this could be a temporary boost due to seasonal fluctuations in the data at the start of the year.
Moody’s Analytics believes that the US economy will experience a “slowcession”, where growth slows but never goes into reverse. In response to the report, US stocks opened lower, the dollar rose against a basket of currencies, and US Treasury prices fell. Financial markets have been on edge since the release of January’s employment report early this month.
The Fed has been expected to deliver two additional rate increases of 25 basis points in March and May, and financial markets are betting on another increase in June. The US central bank has raised its policy rate by 450 basis points since last March from near zero to a 4.5 percent to 4.75 percent range.
The personal consumption expenditures (PCE) price index rose 0.6 percent last month, the largest increase since June 2022. In the 12 months through January, the PCE price index accelerated 5.4 percent after rising 5.3 percent in December. Excluding volatile food and energy components, the PCE price index increased 0.6 percent, the biggest gain since August 2022. This left some economists to expect that the road to disinflation would be slow and bumpy.
Personal income increased 0.6 percent in January, mostly due to strong wage growth. Income at the disposal of households after adjusting for inflation surged 1.4 percent, the largest increase since March 2021. Consumers boosted savings even as they increased spending, with the saving rate rising to 4.7 percent, the highest in a year, from 4.5 percent in December.