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  • EXECUTIVE SUMMARY 2-Falling U.S. Consumer Spending and Rising Inflation Pose a Dilemma for the Fed

EXECUTIVE SUMMARY 2-Falling U.S. Consumer Spending and Rising Inflation Pose a Dilemma for the Fed

By on January 28, 2022 0

U.S. consumer spending fell in December, suggesting the economy lost steam heading into the new year amid tangled supply chains and rampaging COVID-19 infections , while annual inflation has been rising at a rate last seen almost 40 years ago.

Wage inflation is also building up against a backdrop of acute labor shortages. Private sector wages rose sharply in the fourth quarter, posting their biggest annual rise since the mid-1980s, other data showed on Friday. Mounting inflationary pressures could force the Federal Reserve to aggressively raise interest rates, stifling growth, economists have warned. “No one wants to go back to the 80s, but the economy is. Could stagflation from an overly aggressive Fed be next?” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed has let its guard down and now it’s risking everything saying it may have to go faster and higher on interest rates.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.6% last month after rising 0.4% in November, the Commerce Department said. The decline is in line with economists’ expectations. The data was included in the preliminary gross domestic product report for the fourth quarter released on Thursday. The economy grew at an annualized rate of 6.9% last quarter, accelerating from the 2.3% pace in the July-September quarter. This helped push growth in 2021 to 5.7%, the strongest since 1984. The economy contracted 3.4% in 2020.

Consumer spending fell in December, likely because Americans began holiday shopping in October over fears of empty store shelves due to widespread shortages of goods, including motor vehicles. Spending on goods fell 2.6%, led by automobiles. Spending on services increased by 0.5%, driven by health.

Soaring coronavirus infections caused by the Omicron variant have slowed improvements in supply chains, with workers calling in sick. Worsening shortages kept inflation high last month. The personal consumption expenditure (PCE) price index, excluding the volatile components of food and energy, 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 September 1983. The core PCE price index rose 4.7% over the past 12 month ending in November.

Wall Street stocks were down. The dollar remained stable against a basket of currencies. US Treasury prices rose. GROWTH IN EMPLOYEE PRESSURES

Inflation is well above the Fed’s flexible 2% target. The U.S. central bank said on Wednesday it would likely raise interest rates in March. Bank of America Securities is planning seven rate hikes this year. JPMorgan on Friday raised its forecast to five rate hikes from four.

“The challenge now is to rein in inflation without letting the flame of the global economy go out,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “There is no roadmap to do this after inflation has increased.” Signs that inflation could remain stubbornly high were bolstered by a separate Labor Department report on Friday showing the employment cost index, the broadest measure of labor costs, rose 1.0% in the fourth quarter after rising 1.3% in the July-September period.

Labor costs jumped 4.0% year-on-year, the biggest increase since the fourth quarter of 2001, after rising 3.7% in the third quarter. The ECI is widely regarded by policymakers as one of the best measures of labor market slowdown and a predictor of underlying inflation, as it adjusts for changes in the composition and quality of jobs.

The labor market is considered to be at or near maximum employment. There were 10.6 million job openings at the end of November. Wages and salaries rose 1.1% in the last quarter after rising 1.5% in the third quarter. They rose 4.5% year-on-year, the largest increase since the second quarter of 1990. Private sector wages rose 1.2% and jumped 5.0% year-on-year, the highest since the first quarter of 1984. Benefits for all workers rose 0.9% after a similar gain in the July-September quarter.

But high inflation reduces wage gains, eroding consumers’ purchasing power. Rising costs of living and pandemic fatigue drove consumer confidence to a 10-year low in January. The Commerce Department report showed inflation-adjusted consumer spending fell 1.0% in December after falling 0.2% in November.

The decline in so-called real consumer spending put consumption on a slower growth path heading into the first quarter, which could lower overall economic growth. Consumer spending grew at a rate of 3.3% last quarter. Growth forecasts for the first quarter are so far below a 2% rate, with some economists predicting an outright drop in output.

Nonetheless, growth is expected to rebound by the second quarter as the current wave of Omicron infections subside and supply constraints ease. Consumers are sitting on more than $2 trillion in excess savings accumulated during the pandemic. However, it is unclear when and how much of these savings will be spent. Economists also note that most savings come from high-income households, which tend to be savers and some of the money could go into retirement.

“In our minds, despite strong price and wage inflation, it’s disappointing real economic growth that will keep the Fed from delivering full Ratemaggedon this year,” said Paul Ashworth, chief U.S. economist at Capital. Economics in Toronto.

(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)