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Inflation bites: US prices hike is tempering consumer demand | Business and Economy News


In the United States, rapid inflation has eroded wage growth and raised the cost of necessities such as energy, food, and rent.

U.S. inflation-adjusted consumer spending fell in February, suggesting the fastest rate of price growth in four decades is starting to stifle demand.

Purchases of goods and services, adjusted for changes in prices, fell 0.4 percent month-on-month, after rising 2.1 percent in January, according to Commerce Department data on Thursday. Spending on goods has stabilized after last month’s spike, while a drop in Covid-19 cases has supported rising costs for services.

US prices rising at fastest rate in 4 decades are holding back demand

The consumer spending price index, which the Federal Reserve uses for its inflation targeting, rose 0.6 percent from a month earlier and 6.4 percent from February 2021, a high. The most since 1982. Unadjusted for inflation, spending rose 0.2 percent month-on-month, while income rose 0.5 percent.

The median forecast in a Bloomberg survey of economists called for a 0.2 percent drop in inflation-adjusted spending from the previous month and a 6.4 percent increase in the price index from a year ago.

Following omicron-related volatility in the previous two months, government data showed US consumers are feeling the pressure of inflation at the fastest pace in decades. The continued strength of the labor market – coupled with excess savings – has given many households the ability to spend enough to sustain spending.

However, rapid inflation has eroded wage growth and raised the cost of necessities such as energy, food and rent. This comes at the same time as families receiving less government pandemic aid, hurting the spending outlook.

The rise in inflation last month only added to concerns about the breadth and persistence of price pressures, corroborating the Fed’s calls for more aggressive rate hikes. A solid March jobs report on Friday, based on the latest price data, could bolster expectations of a half-percentage point rise in the Fed’s benchmark interest rate in May.

“It continues to look like hope for supply-side healing will come over time as the world eventually settles back into some new normal, but the timing and extent of relief is highly uncertain. ,” Fed Chairman Jerome Powell said in a final speech. week. “In the meantime, as we set policy, we will review actual progress on these issues and do not assume that supply will decrease significantly in the short term.”

Treasury yields remain lower, the S&P 500 opens lower and the dollar remains higher after the data. Money market derivatives remain unchanged for a 70% chance the Fed will raise rates by 50 basis points at its meeting in May.

The Fed’s Challenge

The Fed will have to balance tackling even higher inflation with the growing risk of a consumer slowdown amid rising prices and increased uncertainty.

Spending on inflation-adjusted goods fell 2.1% month-on-month after January rose 5.6%. Spending on services increased by 0.6%, the highest in 7 months.

The PCE Core Price Index, which excludes food and energy and is generally considered a more reliable indicator of core inflation, was up 0.4% month-on-month and up 5.4% month-on-month. A year ago.

The report largely reflects the inflationary environment before Russia started the war in Ukraine, which pushed prices even higher. Rapid inflation across the US economy has left households with less cash to spend on discretionary goods and services like dining out. And although wages and wages rose to their highest in four months, inflation has eroded much of the gain.

The personal savings rate – or personal savings as a share of disposable income – came to 6.3%, though still near an eight-year low. When adjusted for inflation, personal disposable income fell for the seventh straight month.

Data ahead of March jobs report on Friday. Economists estimate employers added about half a million jobs as pandemic restrictions eased. They also noticed an increase in hourly earnings growth and an increase in the workforce.

A separate report out Thursday showed that state jobless claims rose last week from the lowest level since 1969.

(Market Update)

–With support from Craig Torres, Chris Middleton and Liz Capo McCormick.



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