US consumer spending flattens; core inflation still hot

US consumer spending was unchanged in March as an increase in outlays on services was offset by a decline in goods, but persistent strength in underlying inflation pressures could see the Federal Reserve raising interest rates again next week.

Stubbornly high inflation was underscored by other data on Friday showing labour costs increasing solidly in the first quarter as a tight labor market continued to drive wage gains in the private sector. With the economy, however, shifting to lower gear, the anticipated rate hike next Wednesday could be the last in the current cycle, which is the fastest since the 1980s.

Tighter credit conditions following recent financial market turmoil have added to the risks of a recession this year. A fight to raise the federal government’s $31.4 trillion borrowing cap also poses a threat to the economy.

“The Fed is in a tough spot,” said Bill Adams, chief economist at Comerica Bank in Dallas. “The economy is cooling, but inflation is still too high. The components of inflation that the Fed worries will be most persistent, labor-intensive services, are especially sticky.”

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

Spending on services rose 0.4 per cent, driven by housing and utilities as well as healthcare. Goods outlays fell 0.6 per cent as purchases of motor vehicles, mostly new light trucks, decreased. Lower gasoline prices also contributed to the decline in goods spending. Economists polled by Reuters had forecast consumer spending dipping 0.1 per cent.

The data was included in the advance gross domestic product report for the first quarter published on Thursday, which showed consumer spending surging at a 3.7 per cent annualised rate that period after rising at a 1.0 per cent pace in the October-December quarter.

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

Consumer spending is plateauing likely as Americans become more averse to higher prices. Government social benefits are also dwindling. A temporary boost to the Supplemental Nutrition Assistance Program (SNAP) benefits authorized 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 on Thursday estimated the end of the extra benefits had resulted in roughly 32 million people getting smaller monthly SNAP payments. They estimated that a household of four with a net monthly income of $2,000 was now getting $600 less in food stamps each month.

Stocks on Wall Street were trading higher. The dollar gained versus a basket of currencies. US Treasury prices rose.

Solid wage gains

The Fed is expected to increase interest rates by another 25 basis points next week. The US central bank has raised its policy rate by 475 basis points since March of last year from the near-zero level to the current 4.75 per cent-5.00 per cent range.

Though inflation is gradually slowing it remains elevated. The personal consumption expenditures (PCE) price index gained 0.1 per cent in March, the smallest increase since last July, after rising 0.3 per cent in February. In the 12 months through March, the PCE price index increased 4.2 per cent. That was the smallest advance since May 2021 and followed a 5.1 per cent rise in February.

Excluding the volatile food and energy components, the PCE price index rose 0.3 per cent, matching February’s gain. The so-called core PCE price index gained 4.6 per cent on a year-on-year basis in March after rising 4.7 per cent in February. The Fed tracks the PCE price indexes for its 2 per cent inflation target.

Economists estimated that core services excluding housing, being closely watched by policymakers, increased 0.2 per cent. The smallest gain since last July followed a 0.3 per cent rise in February, and reflected a drop in portfolio management fees.