WASHINGTON (Reuters) – U.S. consumer spending increased by the most in seven months in January as the government doled out more pandemic relief money to low-income households and new COVID-19 infections dropped, setting up the economy for faster growth in the first quarter.
Despite the strong rebound in consumer spending reported by the Commerce Department on Friday, price pressures were muted. Inflation is being closely watched amid concerns from some quarters that President Joe Biden’s proposed $1.9 trillion COVID-19 recovery package could cause the economy to overheat.
The plan, being considered by the U.S. Congress, would be on top of a rescue package worth nearly $900 billion approved by the government in late December. Federal Reserve Chair Jerome Powell has played down the inflation fears, citing three decades of lower and stable prices.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 2.4% last month. That was the biggest gain since last June and ended two-straight monthly declines. Personal income shot up 10%, the largest increase since last April, after rising 0.6% in December.
Consumers bought motor vehicles, recreation goods, food and beverages. They also boosted spending on services such as hotel accommodations and restaurants, as well as doctor visits.
Economists polled by Reuters had forecast consumer spending rebounding 2.5% in January and income accelerating 9.5%.
When adjusted for inflation, consumer spending increased 2% last month after decreasing 0.8% in December.
Further gains in consumer spending are likely, though winter storms, which wreaked havoc in Texas and other parts of the densely populated South this month could slow momentum. Daily coronavirus cases and hospitalizations have dropped to levels last seen before the Thanksgiving and Christmas holidays, while the pace of vaccination is picking up.
The recent stimulus package included $600 checks to mostly low-income and some middle-income Americans. The package also extended a government-funded weekly unemployment subsidy as well as benefits for millions of people who do not qualify for state unemployment programs as well as those who have exhausted their six months of eligibility. These benefits expire in mid-March.
The Biden administration’s plan, if approved, will send additional $1,400 checks to qualified households and extend the government safety net for the unemployed.
Economists last week boosted their first-quarter GDP growth estimates to as high as a 6% annualized rate from as low as a 2.3% pace following January’s blowout retail sales data and indications that the White House’s massive stimulus package could be fully approved. Growth estimates could be raised even higher after the consumer spending report.
U.S. stocks were set to open higher. The dollar rose against a basket of currencies. U.S. Treasury yields fell.
SAVINGS JUMP
Some of the stimulus money sent to households was saved. The saving rate jumped to 20.5% last month from 13.4% in December.
Inflation was benign. The personal consumption expenditures (PCE) price index excluding the volatile food and energy component rose 0.3% after a similar gain in December. In the 12 months through January, the so-called core PCE price index increased 1.5% after advancing 1.4% in December.
The core PCE price index is the Fed’s preferred inflation measure for its 2% target, a flexible average.
Powell this week told lawmakers that the U.S. central bank would keep interest rates low and continue to pump money into the economy through bond purchases “at least at the current pace until we make substantial further progress towards our goals (maximum employment and inflation).”
(Reporting by Lucia Mutikani; Editing by Alex Richardson and Andrea Ricci)
