U.S. consumer spending declines further; inflation gradually rising

WASHINGTON (Reuters) – 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 2% target, a flexible average, is unlikely to worry policymakers. The U.S. central bank is seen maintaining its ultra-easy policy stance for a while as the economy battles the COVID-19 pandemic. Excess capacity remains throughout the economy, which could limit companies’ ability to raise prices.

“The Fed would like inflation to average 2%, so it would like inflation to temporarily move above 2%,” 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 0.2% 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 0.7% in November. Economists polled by Reuters had forecast spending falling 0.4% in December.

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

Graphics: Personal consumption –

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

“Not only will consumption start from a weak base but containment measures that are restricting activity will likely weigh on spending,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.

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

Graphics: Consumer sentiment –

Growth is expected to decelerate to around a 2% rate in the first quarter as the economy works through the disruptions from a virus surge in winter. The government provided nearly $900 billion in additional relief in late December. This together with an anticipated pick-up in the distribution of vaccines is likely to spur faster growth by summer.

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

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

INCOME REBOUNDS

The late December stimulus package included direct cash payments to some households and renewed a $300 unemployment supplement until March 14. Government-funded programs for the self-employed, gig workers and others who do not qualify for the state unemployment programs as well as those who have exhausted their benefits were also extended.

That helped to boost personal income, which rebounded 0.6% after tumbling 1.3% in November. Some of the money was stashed away. The saving rate rose to 13.7% from 12.9% in November.

Despite weak consumer spending inflation edged higher. The personal consumption expenditures (PCE) price index excluding the volatile food and energy component gained 0.3% after being unchanged in November.

In the 12 months through December, the so-called core PCE price index increased 1.5% after advancing 1.4% in November. The core PCE index is the Fed’s preferred inflation measure.

Graphics: Inflation –

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

That lifted the year-on-year rate of increase to 2.5% from 2.4% 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. Economists had forecast the ECI climbing 0.5% in the fourth quarter. Wages and salaries increased 0.9% after gaining 0.4% in the third quarter.

But with employment still 10 million jobs below its 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, driven by fiscal stimulus and the inoculation of more Americans against COVID-19, is also expected to boost price pressures.

Bottlenecks in the supply chain are raising costs for manufacturers and they are passing on the increases 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.

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