Consumer spending in the United States increased slightly in February and, although inflation has come down, it remains high enough to allow the Federal Reserve to raise interest rates again.
The slowdown in consumer spending, announced Friday by the Commerce Department, followed the largest increase in nearly two years in January. Consumer spending, which continues to be supported by job vacancies, is expected to rise this quarter after growing at its slowest pace in two and a half years in the fourth quarter of 2022.
“GDP growth in the first quarter appears to be better than expected, although there is a real possibility that consumption and economic growth will slow slightly by the middle of the year,” said Sal Guatieri, senior economist at BMO Capital Markets, which thinks the Fed could raise interest rates again in May.
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.2% last month. January’s data has been revised up to show a 2.0% increase in spending instead of the 1.8% previously reported. January’s increase was the largest since March 2021. Economists polled by Reuters had forecast a 0.3% rise in consumer spending.
President Joe Biden, commenting on today’s Commerce Department report, said his administration has been successful in tackling inflation.
“Today’s report shows annual inflation is down nearly 30% from last summer due to low unemployment and strong economic growth. The fight against inflation is not over yet,” the president said in a statement, adding that his administration was working daily to resolve the problem.
Biden noted that “February saw the lowest food inflation in nearly two years.”
The consumer price index (PCE) rose 0.3% last month after accelerating 0.6% in January. In the 12 months from February 2022 to February 2023, the PCE index rose 5.0%, down 5.3% from January. Excluding the volatile food and energy categories, food inflation rose from 0.5% in January to 0.3% in February. The underlying RFE index fell from 4.7% YoY in January to 4.6% in February.
“The economy looks strong today, but its outlook is still uncertain as banks may withdraw the loans they provide to help the economy grow,” said Christopher Rupki, chief economist at FWDBONDS.
Financial market tensions following the recent collapse of two regional banks have heightened the risk of a recession later this year. Banks have tightened lending standards, which could make it harder for households to get credit due to lower demand.
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