WASHINGTON, March 13 - U.S. consumer spending increased solidly in January amid higher prices, and the dragging Middle East conflict threatens to add to inflation, bolstering expectations that the Federal Reserve would not resume cutting interest rates before September.
Despite the slightly larger-than-expected increase in spending reported by the Commerce Department, other data on Friday hinted at downside risks to the economic outlook after gross domestic product growth slowed at a sharper pace than initially thought in the fourth quarter.
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, were unchanged in January and consumer sentiment ebbed in early March. Consumer spending barely rose when adjusted for inflation.
Following in the wake of unexpected job losses in February, the reports pose a dilemma for the U.S. central bank.
Economists expected the Fed to keep its benchmark overnight interest rate in the 3.50%-3.75% range next Wednesday, and signal rate cut delays. Financial markets anticipate a single rate reduction this year in September.
We now see a steep rise in inflation and weaker economic activity in the second quarter due to the spike in gasoline and energy prices, weaker exports as the rest of the world reels from the disruptions, and an erosion in business confidence," said Kathy Bostjancic, chief economist at Nationwide.
Consumer spending, which accounts for more than two-thirds of economic activity, increased 0.4% after advancing by the same margin in December, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending advancing 0.3%.
Real consumer spending edged up 0.1% in January.
Nominal spending was driven by outlays on healthcare, housing and utilities as well as financial services and insurance, due to higher prices. There was increased spending on food, recreational goods and vehicles, and furnishings and durable household equipment, reflecting the pass-through from tariffs.
Spending on discretionary services, including food at restaurants and bars as well as hotel and motel stays, dropped, a sign of caution among households. Growth in outlays on recreation and transportation services slowed. Spending on clothing and footwear declined.
The BEA is still catching up on data releases following delays caused by last year's government shutdown.
The longest-ever shutdown, which weighed on government spending, contributed to GDP growth rising at only a 0.7% annualized rate in the fourth quarter.
That was a sharp downward revision from the previously estimated 1.4% growth pace and reflected downgrades to last quarter's estimates of consumer spending, exports, state and local government structures investment as well as business spending on intellectual products and factory construction.
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