US consumer spending up solid 0.5 per cent in January

WASHINGTON – The economy got off to a good start in the new year. Americans boosted their spending in January at the fastest pace in eight months, while their incomes increased by the largest amount since June.

Consumer spending rose 0.5 per cent last month, up from 0.1 per cent in December, the Commerce Department reported Friday. Incomes also grew 0.5 per cent in January, up from 0.3 per cent in December.

Consumer spending accounts for two-thirds of economic activity, and the solid showing is likely to bolster expectations that consumers will fuel overall economic growth this quarter.

A key price gauge increased 1.3 per cent in January compared to 12 months ago, nearly double the 0.7 per cent gain seen in December. The Federal Reserve has said an acceleration of inflation will be a key factor determining the pace of future interest rate hikes.

Inflation is still running below the Fed’s target of 2 per cent annual increases. But a 1.3 per cent gain over the past 12 months is significantly closer to that goal than the readings over the past year. Fed Chair Janet Yellen had been predicting that inflation would start to move higher this year as the impact of last year’s steep declines in energy prices start to fade.

The Fed boosted a key interest rate by a quarter-point in December, the first increase in nearly a decade. But Fed officials left rates unchanged in January and are not expected to raise rates at their next meeting in March.

Private economists have trimmed their forecasts for rate hikes this year from four to just two, with the first hike expected in June. However, if inflation rises more quickly than expected, they may adjust those forecasts.

A separate report Friday showed that the overall economy grew at an annual rate of 1 per cent in the final three months of 2015. Economists believe stronger spending will boost GDP growth to around 2 per cent in the current January-March quarter.