America’s consumption plateaus; core inflation remains strong

WASHINGTON, April 28 (Reuters) – U.S. consumer spending was unchanged in March as a rise in spending on services was offset by a decline in goods, but continued strength in underlying inflationary pressures could lead the Federal Reserve to raise interest rates again next week.

Stubbornly high inflation was underscored by other data on Friday that showed labor costs rose solidly in the first quarter as a tight labor market continued to drive private sector wage growth. With the economy shifting into lower gear, the expected interest rate hike next Wednesday is likely to be the last in the current cycle.

Tighter credit conditions following the latest turmoil in the financial markets have increased the risk of a recession later this year. A battle to raise the federal government’s $31.4 trillion borrowing limit also poses a threat to the economy.

“Spending momentum seen at the start of the year is quickly dissipating as high prices weigh on household finances,” said Sofia Baig, economist at decision-making intelligence firm Morning Consult. “However, core inflation remains too high, adding to pressure for the Fed to continue raising interest rates at its next meeting in early May.”

The unchanged reading in consumer spending last month, reported by the Commerce Department, followed a downwardly revised 0.1% increase in February. Consumer spending, which accounts for more than two-thirds of US economic activity, was previously reported to have increased 0.2% in February.

Expenditure on services rose 0.4%, driven by housing and utilities as well as healthcare. This was followed by an increase of 0.2 per cent in February. Goods spending fell 0.6% as purchases of motor vehicles, mostly new light trucks, declined. Lower petrol prices also contributed to the decline in goods consumption, which followed a fall of 0.2% in February.

Economists polled by Reuters had predicted that consumer spending would fall by 0.1 percent. The data was included in the advance first-quarter gross domestic product report published on Thursday, which showed consumption rose at a 3.7% annual rate in that period after rising 1.0% in the October-December quarter.

The overall economy grew by 1.1% as the acceleration in consumer spending was offset by businesses winding down inventories in anticipation of weaker demand later this year. The economy grew by 2.6% in the fourth quarter.

Last month’s flat reading in consumption put consumption and the overall economy on a lower growth path in the second quarter.

Consumer spending is likely to plateau as Americans become more averse to higher prices. Social benefits are also decreasing. A temporary boost to Supplemental Nutrition Assistance Program (SNAP) benefits approved by the US Congress to cushion low-income people and families against the hardships of the COVID-19 pandemic expired in March.

SNAP is commonly known as food stamps. Researchers from the Commerce Department’s Census Bureau estimated Thursday that the end of the supplemental benefits had resulted in roughly 32 million people receiving smaller monthly SNAP payments. They estimated that a household of four with a net monthly income of $2,000 now received $600 less in food stamps each month.

US stocks opened lower. The dollar rose against a basket of currencies. Prices of US government bonds rose.

SOLID WAGE PROFITS

The Fed is expected to raise interest rates by another 25 basis points next week, potentially the latest increase in the US central bank’s fastest monetary tightening cycle since the 1980s. The Fed has raised the key interest rate by 475 basis points since last March from near zero levels to today’s range of 4.75-5.00%.

Although inflation is gradually decreasing, it is still high. The personal consumption goods (PCE) price index rose 0.1% in March, the smallest increase since last July, after rising 0.3% in February. In the 12 months to March, the PCE price index rose 4.2%. It was the smallest advance since May 2021 and followed a 5.1% increase in February.

Excluding the volatile food and energy components, the PCE price index rose 0.3%, corresponding to February’s gain. The so-called core PCE price index rose 4.6% year-on-year in March after rising 4.7% in February. The Fed tracks the PCE price indices for its 2% inflation target.

A separate Labor Department report on Friday showed the Employment Cost Index, the broadest measure of labor costs, rose 1.2% in the first quarter after rising 1.1% in the October-December period. They rose 4.8% year-on-year after rising 5.1% in the fourth quarter.

The ECI is widely regarded by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation, because it adjusts for changes in job composition and quality. There were 1.7 vacancies for every unemployment in February.

Wages and salaries increased 1.2% last quarter after increasing by the same margin in the fourth quarter. They were up 5.0% year-on-year after rising 5.1% in the previous quarter. Wages in the private sector increased by 1.2%, corresponding to the increase in the fourth quarter. They advanced 5.1% from the previous year.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama

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