WASHINGTON – Americans boosted their spending by 0.4 percent in March, the best showing in three months. Meanwhile, a key gauge of inflation closely watched by the Federal Reserve rose at the fastest pace in more than a year.
The March increase in consumer spending followed two months of very weak readings with no gain in February and only a 0.2 percent increase in January, the Commerce Department reported Monday. The result is an encouraging sign that economic growth, which slowed in the first quarter, will accelerate in the current quarter.
Personal incomes advanced a moderate 0.3 percent in March, matching the February gain, but they have been growing strongly.
Consumer spending is considered key to economic growth since it accounts for 70 percent of economic activity. The economy slowed to growth of 2.3 percent in the first quarter, reflecting a slowing in consumer spending. Many analysts believe stronger consumer spending this quarter will lift overall growth back to rates above 3 percent.
An inflation gauge tied to consumer spending advanced 1.9 percent in March compared to 12 months ago. That was the fastest pace since a similar 12-month gain of 1.9 percent in February 2017 and prompted some analysts to predict that the central bank will ultimately decide to raise rates four times this year to make sure inflation does not get out of hand. That would be up from three rate hikes last year.
“As the weaker dollar feeds through to stronger imported goods prices and wage pressures continue to build, we think inflation will rise above the Fed’s 2 percent target later this year and trend gradually higher from there,” said Michael Pearce, senior U.S. economist for Capital Economics.
The Fed seeks to achieve moderate annual increases in inflation of around 2 percent but has fallen below that target for the past six years. Now with unemployment at a 17-year low of 4.1 percent, economists expect that tight labor markets will finally start to lift wage gains and overall inflation.
But there is already a debate inside the Fed about what to do once it has hit the 2 percent inflation target. Some officials say the central bank let inflation rise for a time above that target. Other Fed officials argue that such a move would run the risk of allowing inflation pressures to get out of hand and force the central bank to slam on the brakes by raising interest rates so quickly that it could push the country into a recession.
Fed officials will hold a regular meeting this week. They are expected to keep rates unchanged after raising them in March. But many analysts believe the Fed will raise rates again in June.
The 0.3 percent rise in incomes reflected a slowdown in the key category of wages and salaries, which rose only 0.2 percent in March, just half the 0.4 percent February gain.
The 0.4 percent rise in spending reflected a 0.8 percent surge in spending on durable goods after two months of declines in this category which includes big-ticket items such as autos.
The faster rise in spending compared to income growth meant that the saving rate slipped to 3.1 percent of after-tax income in March, down from 3.3 percent in February.
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