The personal consumption expenditures surprisingly rose while consumers increased their spending in January.
Consumer spending increased and inflation picked up in January, likely setting the Federal Reserve on course to continue raising interest rates in the months to come in order to reduce pricing pressures.
According to estimates released by the Commerce Department Friday, personal income increased 0.6% in January from 0.3% in the month before. U.S. households stepped up their spending in January with a hike to 1.8% – this number fell in December to a revised 0.1%. The personal-consumer expenditure price index, the Fed’s favored measure of inflation, rose quicker in January than expected by economists to 5.4% compared to a year earlier.
Despite higher prices, consumers continued to spend in January with a significant increase in services including eating at restaurants and taking vacations. With the most recent sign of economic strength, the Fed plans to increase interest rates by at least a quarter point, if not more.
The Fed wants to make sure that “inflation is killed,” said James Knightley, chief international economist at ING. “They’re going to do whatever is necessary to ensure that that is the case,” continued Knightley.
The month-to-month revised PCE-price index rose to 0.6% in January from 0.2% in December. In January, the core PCE-price index January’s number also being 0.6% from 0.4% the month prior. Excluding food and energy is the core PCE-price index which increased to 4.7% in January from 4.6% in December compared to a year earlier.
The Commerce Department’s release also showed a continuous increase in personal savings to 4.7% in January from 4.5% in December, after the raise in personal income and the month’s spending boost.
Another notable shift were the changes in what sectors consumers were spending their money on. There was an increase in spending on goods to 2.2%, compared to the decrease of 0.9% in December, with consumers spending $78.1 billion on motor vehicles and parts (led by new light trucks). For services, food away from home showed a solid performance, with consumers spending $69.4 billion, an increase of 0.6%.
“Even with the strong inflation data, consumer resiliency is there,” said Sam Bullard, managing director and senior economist for Wells Fargo’s Corporate and Investment Bank. “Consumers are still confident given that they’re continuing to increase discretionary spending,” Bullard said. But as far as the Fed’s raise in rates goes, Bullard said “we’re fully priced in for another rate hike in June as far as the market goes.”
Housing and utilities saw a change on a month-to-month outlay. In December, consumers spent $33.5 billion, versus $8.8 billion in January – a significant decrease. Food prices also increased 0.4% whilst energy prices increased 2.0%.
The data released on Friday is one of several indications of a stronger than expected economy. According to the most recent jobs data, more than 517,000 jobs were added in January. The retail sales report also indicated a 3% rise in spending.
After January’s job report, which showed strength in the labor market, the Fed will have to debate whether they need to do more to slow down the economy and avoid hiking interest rates for a longer period. “The Fed will have evidence as it gets into its March meeting, but we expect hikes in March, May and June,” said Michael R. Englund, principal director and chief economist for Action Economics LLC.
The Fed’s current rate is from 4.50% to 4.75%, after a 25-basis points rate change raise on February 1 – the lowest rate change since March of 2022. With the Fed’s desired benchmark at 2%, the unexpected increase is a signal that interest rates will continue to go up in the coming months in an effort to successfully reduce inflation or tighten monetary policy.