WASHINGTON (Reuters – US consumer spending rose more than expected in April, boosting the economy’s growth prospects for the second quarter, and inflation picked up, which could allow the Federal Reserve to keep interest rates higher for some time.
Consumer spending rose 0.8% last month, the Commerce Department said Friday. Data for March was revised upwards to show that spending increased by 0.1% instead of remaining unchanged as previously reported. Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of US economic activity, to rise 0.4%.
Last month’s surge in consumer spending tempered economists’ expectations for a sharp slowdown this quarter. While consumer spending accelerated at its fastest pace in nearly two years in the first quarter, much of the growth was concentrated in January. Weakness in February and March put consumer spending on a lower growth trajectory towards the second quarter.
Consumer spending is supported by strong wage increases in a tight labor market. It contributed to labor market resilience, a pick-up in factory production and pick-up in business activity by suggesting the economy was getting back on track after growing at 1.3% year-on-year in the first quarter.
Still, consumer spending has slowed since rising sharply in January as Americans become more price sensitive.
Government social benefits are also dwindling and most lower-income households are said to have depleted their savings during the COVID-19 pandemic.
Credit has also become very expensive following 500 basis point rate hikes by the Fed since March 2022, when the US Federal Reserve embarked on its fastest monetary tightening campaign since the 1980s to curb inflation. Banks are also tightening their lending following the recent financial market turmoil.
The minutes of the Fed’s May 2-3 policy meeting, published on Wednesday, showed that policymakers “generally agreed” that the need for further rate hikes had “become less certain.”
The personal consumption price index (PCE) rose 0.4% in April, following a 0.1% increase in March. In the 12 months through April, the PCE price index rose 4.4% after rising 4.2% in March.
Excluding the volatile food and energy components, the PCE price index rose 0.4% after rising 0.3% in March. The so-called core PCE price index rose 4.7% year-on-year in April, following a 4.6% increase in March. The Fed tracks PCE price indices for its 2% inflation target.
(Reporting by Lucia Mutikani; editing by Chizu Nomiyama)