US consumer spending, which accounts for more than two-thirds of the country’s economic activity, rose 2.1% in January, after falling 0.8% in December, according to the Commerce Department.
The rise was fueled by purchases of motor vehicles, non-durable goods and recreational goods, as well as spending on heating amid frigid temperatures in many parts of the US. Economists polled by Reuters expected consumer spending to pick up 1.5 percent.
This rise was higher than expected, giving the economy a strong boost at the start of the first quarter, but price pressures continued to mount, with annual inflation reaching figures last seen four decades ago (7 percent).
Reports suggest strong underlying strength in the economy that could sustain the expansion as the Federal Reserve (Fed) begins to raise interest rates to quell inflation, and provide a shield against the fallout from Russia’s invasion of Ukraine.
The first rate hike from the US central bank is expected next month. Economists forecast as many as seven this year.
“Never underestimate the American consumer,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto.
Spending is supported by massive savings and strong wage growth in an increasingly tight labor market. This is offsetting the reduction in government money to households.
Personal income was flat last month as a 0.5% rise in wages offset a decline in government welfare benefits. But high inflation is eating into wage gains.
Inflation, which is well above the Fed’s 2% target, could continue to spiral due to the conflict between Russia and Ukraine.
The personal consumption expenditures (PCE) price index increased 0.6% in January, after rising 0.5% in December. In the 12 months to January, the PCE price index advanced 6.1 percent. This is the biggest increase since February 1982 and follows a 5.8% annual rate increase in December.