U.S. consumer spending rose by 2.1 percent in January, despite mounting price pressures, annual inflation rates at a forty year high, and as Americans dealt with the spread of the Omicron variant, according to the Feb. 25 report by the Bureau of Economic Analysis.
The numbers are a major improvement from December 2021, as spending bounced back from a revised 0.8 percent decline at the end of the year.
The recent data shows the U.S. economy starting the year on a solid footing, with employers adding 467,000 jobs in January and retail sales rising to a seasonally adjusted 3.8 percent from December.
Personal income was unchanged for the month, following the expiration of the federal government’s monthly child tax credit, offsetting a 0.5 percent increase in wages.
Consumer spending is being supported by massive savings and strong wage growth amid a tightening labor market, which offset January’s reduction in government subsidies to households.
Actual consumer spending rebounded 1.5 percent in January, with numbers adjusted for inflation.
Spending was led by purchases of vehicles, nondurable goods, and recreational goods, as well as outlays on heating amid freezing temperatures across parts of the country.
However, rising inflation is making consumers think twice about leaving their home or making big purchases. But economists remain optimistic that consumer spending will rise this year as the fear of the pandemic fades and households spend off their accumulated savings.
Rising household expenditures this quarter could be pointing to signs of faster economic growth, as in the United States, consumer spending accounts for roughly two-thirds of the economy.
The Personal Consumption Expenditures Price Index (PCE), which the agency uses to measure inflation, rose to 6.1 percent in January. The boost was the largest rise since February 1982 and followed a 5.8 percent year-on-year increase in December.
Excluding the volatile food and energy components, the PCE price index soared 0.5 percent after rising 0.5 percent in December.
The core PCE price index shot up 5.2 percent year-on-year in January 2022, the biggest rise since April 1983, after last year’s increase of 4.9 percent in the 12 months through December 2021.
The Commerce Department gave a further boost to the economy, with a Feb. 25 report—showing orders for non-defense capital goods, excluding aircraft, widely seen as a good forecast for growth—jumping 0.9 percent last month.
Orders of core capital goods increased 0.4 percent in December, below an earlier forecast of a 0.5 percent rise.
Shipments of core capital goods, which are used to calculate equipment spending in GDP measurements, accelerated 1.9 percent last month after increasing 1.6 percent in December.
Business spending on equipment rebounded in the fourth quarter after being hampered by automobile shortages in the third quarter, due to the global shortage of semiconductors used in vehicle production.
Car and truck orders fell 0.4 percent after increasing 1.8 percent in December.
Orders for civilian aircraft increased 15.6 percent in January after rising 23.9 percent in December.
Durable goods orders, which range from items like aircraft to toasters that last three years or more, went up 1.6 percent last month after rising 1.2 percent in December, boosted by a 3.4 percent increase in orders for transportation equipment, which followed a 1.7 percent rise in December.
However, the threat of an extended conflict in Ukraine in the background is causing disruptions in global energy markets and may further push up U.S. gasoline prices.
The recent U.S. and European sanctions on Russia over its invasion of Ukraine is effecting fuel prices worldwide amid uncertainty over supply.
The Nordstream 2 pipeline project connecting Germany and Russia to deliver natural gas to Europe, has also been suspended for the time being.
On Feb. 24, for the first time in almost eight years, Brent crude-oil prices, the international benchmark, rose above $100 a barrel, before retreating to about $98.7 a barrel on Feb. 25 due to the Ukrainian conflict.
According Moody’s Analytics, oil prices at $100 per barrel would shave 0.1 percentage points from GDP growth in the second quarter and slice off 0.5 percentage points in the third quarter.
Inflation, which is already well above the Federal Reserve’s 2 percent target, could continue to spiral because of the crisis in Ukraine.
Last month’s positive core capital goods report may be a sign that the U.S. economy could maintain its expansion as the Fed starts raising interest rates next month to quell inflation and provide a financial buffer from the conflict overseas.
The first rate hike from the central bank is expected in March and may be the first of as many as seven predicted rate increases this year.