US consumers spend less than forecast as inflation bites

Consumer spending rose less than projected in January as rising prices pinched Americans’ wallets, leading inflation-adjusted purchases to fall by the most since 2009.

The 0.2% advance in spending followed a 0.5% increase in the prior month, the Commerce Department reported on Wednesday in Washington. The median forecast in a Bloomberg survey called for a 0.3% gain.

Incomes rose 0.4%, though inflation-adjusted disposable incomes had the biggest drop since 2013.

The results indicate less momentum at the start of the quarter, and a pickup in inflation may further limit any acceleration in household spending, which accounts for about 70% of the economy.

At the same time, the tight job market and low borrowing costs will continue to support consumers, whose confidence is getting a boost from optimism about lower taxes under President Donald Trump.

The Fed’s preferred measure of consumer prices climbed 0.4% from December and 1.9% from a year earlier, within a shade of its 2% target that was last met in April 2012.

The core price measure, which excludes food and fuel, rose 0.3% from the prior month and was up 1.7% from January 2016.

Inflation effect

Adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases fell 0.3% after a 0.3% increase the previous month.

The Commerce Department said it was the largest drop since September 2009, when the measure declined 1%.

Forecasts for consumer spending ranged from increases of 0.2% to 0.5%, according to the Bloomberg survey. The previous month’s reading was unrevised at a 0.5% gain.

The Bloomberg survey median for incomes was a 0.3% gain. December’s figure was unrevised at a 0.3% advance.

Disposable income, or the money left over after taxes, decreased 0.2% after adjusting for inflation, breaking a more than three-year streak of monthly gains. It rose 0.1% in the prior month.

The saving rate increased to 5.5% from 5.4%. Wages and salaries rose 0.4% for a second month.

Economic driver

The latest figures follow revised fourth-quarter data released on Tuesday that showed consumer spending will remain the driver of this economic expansion.

GDP rose at a 1.9% annualised rate, with consumption adding even more to growth than previously estimated while business investment and government outlays made a smaller contribution.

In January, household outlays on services fell 0.2% after adjusting for inflation. The category includes tourism, legal help, health care, and personal care items such as haircuts, and is typically difficult for the government to estimate accurately.

Purchases of durable goods, which include automobiles, also fell, decreasing 0.8% after adjusting for inflation. That’s the biggest drop since August and follows a 1.8% increase.

Central bankers, scheduled to meet March 14 to 15, are watching for signs that inflation is making progress toward the central bank’s 2% goal.

On Tuesday, two influential Federal Reserve policy makers, William Dudley and John Williams, signalled a greater willingness to tighten monetary policy, perhaps as soon as this month.