Consumer spending has biggest increase in eight months as incomes also post strong gains

Consumers ramped up their spending in January at the fastest pace in eight months as incomes also continued to grow at a strong pace in a sign economic growth is improving after slowing at the end of last year.

Inflation also picked up last month, which could help push Federal Reserve policymakers to enact another interest rate hike when they meet on March 15-16.

Personal consumption expenditures increased by 0.5% last month, up sharply from 0.1% in December, the Commerce Department said Friday.

It was the strongest gain since May and exceeded analyst expectations of a 0.3% increase.

Incomes rose in January for the 10th-straight month and the 0.5% increase was the best since June. Personal income was up 0.3% in December.

With the rate of spending growth keeping pace with income gains, Americans saved the same share of their disposable income. The saving rate in January remained at 5.2%, matching the highest level in a year.

The Commerce Department report also showed inflation rose in January.

The price index for personal consumption expenditures increased 0.1% after declining by 0.1% in December.

So-called core inflation, which excludes volatile food and energy prices, increased 0.3% in January. That compared with a 0.1% increase the previous month.

For the 12 months ended Jan. 31, prices increased 1.3% and core inflation was 1.7%.

Fed policymakers want prices to rise 2% annually and are watching inflation closely to decide whether it is increasing enough to warrant another small hike in the central bank’s benchmark short-term rate next month.

Consumer spending accounts for about two-thirds of U.S. economic activity and the increase in January bodes well for a pick-up in economic growth in the first quarter of the year.

The Commerce Department also reported Friday that the economy grew at a tepid 1% annual rate in the fourth quarter of last year.

The figure was revised up from an initial estimate of just 0.7% growth. But the pace still was much slower than the 2% growth in the third quarter.

Friday’s consumer spending report bolsters analyst expectations that overall economic growth will improve in the first quarter. Chris Rupkey, chief financial economist at Union Bank in New York, said the new data firmed up his forecast for 2.5% growth in the first quarter.

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