FILE PHOTO: People carrying shopping bags walk inside the King of Prussia shopping mall, as shoppers show up early for the Black Friday sales, in King of Prussia, Pennsylvania, U.S. November 26, 2021. REUTERS/Rachel Wisniewski/File Photo
January 28, 2022
By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer spending fell in December, suggesting the economy lost speed heading into the new year amid snarled supply chains and raging COVID-19 infections, while annual inflation increased at a pace last seen nearly 40 years ago.
Wage inflation is also building up amid an acute shortage of workers. Private wages rose strongly in the fourth quarter, posting their largest annual gain since the mid-1980s, other data showed on Friday. Mounting inflation pressures could force the Federal Reserve to aggressively hike interest rates, stifling growth, economists warned.
“No one wants to go back to the 80s, but the economy is. Can stagflation from an overly aggressive Fed be next?” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed let its guard down and now they risk it all by saying they might have to move faster and higher on interest rates.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.6% last month after gaining 0.4% in November, the Commerce Department said. Economists polled by Reuters had forecast consumer spending declining 0.6%.
The data was included in the advance gross domestic product report for the fourth quarter published on Thursday. The economy grew at a 6.9% annualized rate last quarter, accelerating from the July-September quarter’s 2.3% pace.
That boosted growth in 2021 to 5.7%, the strongest since 1984. The economy contracted 3.4% in 2020.
Consumer spending dropped in December likely as the result of Americans starting their holiday shopping in October for fear of empty shelves at stores because of rampant shortages of goods, including motor vehicles. Sky-rocketing coronavirus infections driven by the Omicron variant also reduced traffic to places like restaurants and bars, as well as other high contact venues.
The shortages owing to overstretched supply chains kept inflation elevated last month. The personal consumption expenditures (PCE) price index increased 0.4% after rising 0.6% in November. In the 12 months through December, the PCE price index increased 5.8%. That was the largest advance since 1982 and followed a 5.7% year-on-year increase in November.
Excluding the volatile food and energy components, the PCE price index rose 0.5% after a similar gain in November. The so-called core PCE price index accelerated 4.9% year-on-year in December, the biggest rise since 1983. The core PCE price index increased 4.7% in the 12 months through November.
WAGE PRESSURES GROWING
Inflation is running way above the Federal Reserve’s flexible 2% target. The Fed on Wednesday said it was likely to raise interest rates in March.
Signs that inflation could remain elevated for a while were reinforce by a separate report from the Labor Department on Friday showing the Employment Cost Index, the broadest measure of labor costs, rose 1.0% in the fourth quarter after increasing 1.3% in the July-September period.
Labor costs surged 4.0% on a year-on-year basis, the largest rise since 2001, after increasing 3.7% in the third quarter.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes. Economists had forecast the ECI advancing 1.2% in the fourth quarter.
The labor market is viewed as being at or near maximum employment. There were 10.6 million job openings at the end of November.
Wages and salaries rose 1.1% last quarter after increasing 1.5% in the third quarter. They were up 4.5% year-on-year. Private industry wages rose 1.2% and shot up 5.0% year-on-year, the most since the mid-1980s. Benefits for all workers rose 0.9% after a similar gain in the July-September quarter.
But high inflation is cutting into wage gains, eroding consumers’ purchasing power. The report from the Commerce Department showed consumer spending adjusted for inflation dropped 1.0% in December after slipping 0.2% in November.
The decline in the so-called real consumer spending set consumption on a slower growth trajectory heading into the first quarter. Consumer spending increased at a 3.3% rate in the fourth quarter. Growth forecasts for the first quarter are so far below a 2% rate.
“To our minds, despite the strength of price and wage inflation, it is disappointingly weak real economic growth that will prevent the Fed from delivering a full-blown Ratemaggedon this year,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
Source: One America News Network
