U.S. inflation-adjusted consumer spending rose in March despite intense price pressures, indicating households still have solid appetites and wherewithal for shopping.
Purchases of goods and services, adjusted for changes in prices, increased 0.2% from the prior month, following a 0.1% gain in February that was revised from a previously reported decline, according to Commerce Department figures Friday. The gain was driven by services, while merchandise buying dropped, signaling a shift in consumer behavior as pandemic concerns wane.
The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, advanced 0.9% from a month earlier and 6.6% from March 2021, the most since 1982. Unadjusted for inflation, spending rose 1.1% from the prior month, while incomes increased by more than expected.
The median forecasts in a Bloomberg survey of economists called for a 0.1% decrease in inflation-adjusted spending from the prior month and a 6.7% rise in the price index from a year ago.
The figures show that even as consumer prices continue to grow at the fastest rate in decades, demand is strong enough to outpace inflation. A tight labor market and excess savings accumulated during the pandemic have helped Americans spend, despite inflation eroding wage growth and driving up the cost of living.
A separate report Friday showed employment costs in the first quarter rose 1.4% from the prior three months, the third consecutive period with an increase of at least 1%. Labor cost pressures are also adding to inflation as employers charge more their of customers to offset higher pay.
Friday’s Commerce Department figures fill in some of the details behind Thursday’s gross domestic product report, which showed that the U.S. economy shrank in the first quarter for the first time since 2020, mostly reflecting a ballooning trade deficit, though consumer spending was solid during the period.
The inflation data likely reaffirm Fed officials’ calls to hike interest rates by a more aggressive half-point at their meeting next week. That said, the Russia-Ukraine war and COVID lockdowns in China have added uncertainty to the global economic outlook, and could make it more difficult for the Fed to tighten policy without causing a recession.
In addition to the headline inflation figure, which was in line with forecasts, the core PCE price index, which excludes food and energy and is often seen as a more reliable guide to underlying inflation, rose 0.3% from the prior month. It increased 5.2% from a year earlier, a slight deceleration from a 5.3% gain in February.
In March, inflation-adjusted spending on goods fell 0.5% from the prior month, while services rose 0.6%, matching the biggest gain since July. Economists have been expecting demand for merchandise to wane as COVID fears subside and more Americans spend on travel, entertainment and other services.
Not adjusted for inflation, the gain in services spending was broad-based and led by components including international travel, restaurants and hotels, according to the Commerce Department.
Wages and salaries increased 0.6% in March. But when adjusted for inflation, disposable personal income fell 0.4%, the biggest decline since September.
The personal saving rate dropped to 6.2% in March, the lowest since 2013, indicating that Americans are returning to more normal saving patterns now that pandemic federal support has largely ended.
—With assistance from Chris Middleton.
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