US consumers shrug off high inflation and lean on savings to fuel spending

Shoppers browse a supermarket in north St. Louis, Missouri, U.S., April 4, 2020. REUTERS/Lawrence Bryant/File photo

WASHINGTON, April 29 (Reuters) – U.S. consumer spending rose more than expected in March amid strong demand for services, while monthly inflation rose to its highest level in 16-and-a-half years. , which gave the Federal Reserve ammunition to raise interest rates by a hefty 50 basis points next week.

The case for an aggressive monetary policy stance by the US central bank was also bolstered by other data on Friday that showed US workers’ compensation posted its biggest increase in more than three decades in the first quarter. . Companies are raising wages in a desperate attempt to attract scarce workers.

Strong consumer spending heading into the second quarter allayed fears of a recession after the economy unexpectedly contracted in the first three months of the year.

“There is nothing about to go wrong with the economy if the consumer continues to encourage the path to prosperity,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “There is no recession on the horizon yet.”

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 1.1% last month, the Commerce Department said. February data was revised up to show disbursements advancing 0.6% instead of 0.2% as previously reported.

Spending on services increased 1.1%, driven by demand for international travel, restaurant dining and hotel stays. There were also increases in health care spending and spending on recreation and transportation services.

Spending on goods increased 1.2%, mainly reflecting gasoline and other energy products, as well as food, whose prices have increased considerably. Spending on long-lived goods such as motor vehicles fell for the second month in a row due to shortages.

Economists polled by Reuters had forecast consumer spending rising 0.7%. Even with sky-high prices, inflation-adjusted consumer spending managed to rise 0.2% last month, highlighting the underlying strength of the economy in an increasingly turbulent environment.

The data was included in Thursday’s advanced first-quarter gross domestic product report, which showed the economy contracted at an annualized rate of 1.4% due to a wider trade deficit. This was due to increased imports and a slower pace of inventory buildup relative to the strong pace in the fourth quarter. Consumer spending rebounded last quarter, combining with business investment to boost domestic demand. read more

Stocks on Wall Street fell. The dollar fell against a basket of currencies. US Treasury yields rose.

PEAK INFLATION?

The price index for personal consumption expenditures (PCE) soared 0.9% in March, the biggest increase since September 2005, after climbing 0.5% in February. In the 12 months through March, the PCE price index rose 6.6%, the biggest gain since January 1982, after rising 6.3% in February.

March, however, likely marked the peak in that price index. Economists expect the rise in the annual PCE price index to start to slow as last year’s big gains disappear from the calculation. In addition, the shift in spending from goods to services is seen as relieving pressure on supply chains.

Excluding volatile food and energy components, the PCE price index rose 0.3% after a similar gain in February. The so-called core PCE price index rose 5.2% year-on-year in March after accelerating 5.3% in February.

Annual inflation by all measures has exceeded the Fed’s 2% target and the central bank is expected to raise interest rates by half a percentage point next Wednesday. The Fed raised its policy rate by 25 basis points in March and is likely to start cutting its asset holdings soon.

Even if inflation has peaked, it could remain uncomfortably high for a while. A separate report from the Labor Department on Friday showed its labor cost index, the broadest measure of labor costs, rose 1.4% in the first quarter after advancing 1.0% in the period from October to december.

Labor costs soared 4.5% year-on-year, the biggest gain since 2001, after rising 4.0% in the fourth quarter.

Policymakers consider the ECI to be one of the best measures of labor market slack and a predictor of core inflation as it adjusts for changes in the composition and quality of work.

“With compensation costs from an overheated labor market a more persistent source of inflation and more within the Fed’s grasp, today’s report raises the possibility of multiple 50-point rate hikes at upcoming meetings, beginning with next week’s meeting,” said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina.

There was a near record 11.3 million vacancies at the end of February.

Wages and salaries rose 1.2% last quarter after rising 1.0% in the fourth quarter. They rose 4.7% year-on-year. But high inflation eroded employee earnings. Inflation-adjusted wages fell 3.6% year-on-year.

Profits rose 1.8%, the most in 18 years, after rising 0.9% in the October-December quarter.

With inflation eating into offsetting earnings, consumers are turning to savings to finance their spending, which some say suggests a slowdown in consumption is on the way.

The savings rate fell to 6.2%, the lowest since December 2013, from 6.8% in February. Consumers accumulated more than $2 trillion in excess savings during the pandemic.

“Rising prices are wiping out the real value of these savings,” said Andrew Hollenhorst, chief US economist at Citigroup in New York. “Real incomes excluding transfer payments have been essentially flat over the past six months, implying that wages need to accelerate further or real consumption will continue to slow.”

Information from Lucía Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

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