U.S. consumer spending gains steam

U.S. consumer spending rose solidly in January and underlying inflation picked up by the most in four years, keeping Federal Reserve interest rate increases on the table this year.

The upbeat data on Friday added to reports on manufacturing and employment that have suggested economic growth picked up at the start of the year after slowing in the fourth quarter.

The economic growth outlook was further bolstered by steady consumer sentiment in February despite recent stock market turmoil. That should help ease fears of a looming recession.

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"Consumers revved it up a notch and inflation quickened as well at the start of the year. Consumers are sending a strong message that the economy is on the right track for continued growth this year," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The Commerce Department said consumer spending increased 0.5 percent, the largest gain since March, as households ramped up purchases of a range of goods and the return to normal winter temperatures boosted demand for heating.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose by an upwardly revised 0.1 percent in December. Economists polled by Reuters had forecast consumer spending rising 0.3 percent last month after a previously unchanged reading in December.

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Prices for U.S. Treasury debt extended losses on the data, while U.S. stocks were trading higher. The dollar .DXY rose against a basket of currencies.

With spending picking up, there were also signs of price pressures stirring last month, which will most likely be welcomed by Fed officials amid low inflation expectations that could keep inflation below the U.S. central bank's 2 percent target for an extended period.

A price index for consumer spending edged up 0.1 percent after dipping 0.1 percent in December. In the 12 months through January, the personal consumption expenditures (PCE) price index rose 1.3 percent, the largest increase since October 2014. The PCE index advanced 0.7 percent in December.

Excluding food and energy, prices rose 0.3 percent. That was the largest increase since January 2012 and followed a 0.1 percent gain in December.

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The so-called core PCE price index increased 1.7 percent in the 12 months through January, the largest rise since July 2014. The core PCE, the Fed's preferred inflation measure, rose 1.5 percent in December.

Although financial markets have eliminated bets for a March rate hike, the combination of solid consumer spending, a strengthening labor market and steadily rising inflation suggests further monetary policy tightening cannot be ruled out this year. The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.

SENTIMENT STEADY

Separately, the University of Michigan said its consumer sentiment index rose to 91.7 February after slipping to a reading of 90.7 early in the month. It was slightly down from January's reading of 92.0.

In January, consumer spending was supported by a 0.5 percent rise in income as the labor market continued to tighten. That was the largest increase since June and added to a 0.3 percent rise in December.

Wages and salaries shot up 0.6 percent also as minimum wage increases came into effect in some states. Wages and salaries increased 0.2 percent in December.

Earlier, the Commerce Department said gross domestic product increased at a 1.0 percent annual rate in the fourth quarter as businesses were less aggressive in their efforts to reduce unwanted inventory.

The economy was previously reported to have grown at a 0.7 percent pace in the fourth quarter and economists had expected that GDP growth would be revised down to a 0.4 percent rate. The economy expanded at a 2.0 percent pace in the third quarter and grew 2.4 percent in 2015.

Businesses accumulated $81.7 billion worth of inventory in the fourth quarter rather than the $68.6 billion reported last month. The largest contributors to the upward revision to inventory investment were retail trade and mining, utilities and construction.

As a result, inventories subtracted only 0.14 percentage point from GDP growth instead of the previously reported 0.45 percentage point.

The bigger inventory build is bad news for first-quarter GDP growth as it means businesses will have little incentive to place new orders, which will continue to hold down production.

"The weaker drag from inventories in the fourth quarter means that any rebound in the first quarter could be slightly more modest than we previously expected," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

"Nevertheless, it still appears that first-quarter GDP growth is on track to rebound to a very healthy 2.5 percent annualized or higher, which should dampen any concerns about an imminent recession."

First-quarter GDP growth estimates are as high as a 2.5 percent rate, but the risks are tilted to the downside amid slowing world economies, a strong dollar and the recent global stock market sell-off that has tightened financial market conditions.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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