US inflation increases in December; consumer spending robust

The increase was in line with economists' expectations. Goods prices rose 0.2%, the first gain in five months, lifted by higher costs for motor vehicles and parts as well as gasoline and other energy goods, which jumped 4.2%.

Washington: US inflation increased by the most in eight months in December amid robust consumer spending on goods and services, suggesting the Federal Reserve would probably be in no hurry to resume cutting interest rates soon.

While the report from the Commerce Department on Friday showed a modest gain in prices excluding the volatile food and energy components on a monthly basis, the annual increase in the so-called core inflation has not slowed since October. The disinflation progress stalled in the fourth quarter.

The US central bank kept rates unchanged on Wednesday for the first time since launching its policy easing cycle in September. The policy statement accompanying the decision did not include the reference to inflation having "made progress" toward the Fed's 2 per cent target. The inflation outlook has been clouded by uncertainty about the economic impact of President Donald Trump's fiscal, trade and immigration policies.

"The Fed's prognosis is for a slower pace of monetary easing moving forward, as the economy is doing well and prices are only slowly returning to target in an environment of great uncertainty," said Carl Weinberg, chief economist at High Frequency Economics. "These data support that strategy."

The Personal Consumption Expenditures (PCE) Price Index rose 0.3 per cent last month, the largest increase since last April, after an unrevised 0.1 per cent gain in November, the Commerce Department's Bureau of Economic Analysis said.

The increase was in line with economists' expectations. Goods prices rose 0.2 per cent, the first gain in five months, lifted by higher costs for motor vehicles and parts as well as gasoline and other energy goods, which jumped 4.2 per cent.

Prices of furnishings and durable household equipment plunged as they did for recreational goods and vehicles. The cost of services increased 0.3 per cent amid gains in transportation, recreation, and housing and utilities.

In the 12 months through December, PCE inflation advanced 2.6 per cent. That was the biggest gain in seven months and followed a 2.4 per cent rise in November.

The data was included in the advance gross domestic product report for the fourth quarter published on Thursday. The Fed tracks the PCE price measures for monetary policy. It has reduced its benchmark overnight interest rate by 100 basis points to the 4.25 per cent-4.50 per cent range since September.

The central bank has forecast only two rate cuts this year, down from the four it had projected in September amid caution over the new Trump administration's plans for tax cuts, broad tariffs on imports and an immigration crackdown, which economists view as inflationary.

No rate cut is expected before June. Stripping out the volatile food and energy components, the PCE price index rose 0.2 per cent last month after an unrevised 0.1 per cent increase in November. In the 12 months through December, the core inflation advanced 2.8 per cent, rising by the same margin for three straight months.

Some economists highlighted the slight monthly gain in core inflation and a separate report from the Labor Department's Bureau of Labor Statistics showing a marginal rise in labor costs on the fourth quarter as signs that the disinflationary trend remained intact. Core inflation rose at a 2.2 per cent annualized rate in the three months to December.

"That will be welcome news at the Fed, though as conveyed in recent Fed speak the committee will be patient in considering further interest rate cuts, and we still see them on hold until mid-year," said Abiel Reinhart, an economist at JPMorgan.

Fed Chair Jerome Powell this week indicated policymakers were watching the 12-month inflation "because that takes out the seasonality issues that may exist."

Stocks on Wall Street were higher. The dollar advanced against a basket of currencies. U.S. Treasury yields rose.

Labour costs rise

The employment cost index (ECI), the broadest measure of labor costs, gained 0.9 per cent in the fourth quarter after rising 0.8 per cent in the third quarter. Labor costs climbed 3.8 per cent in the 12 months through December, the slowest since the third quarter of 2021, after increasing 3.9 per cent in the year through September.

The ECI is viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.

"The ECI is still consistent with price stability as long as labor productivity continues to grow around 2 per cent year-over-year," said Sal Guatieri, a senior economist at BMO Capital Markets. "However, deportations could add some pressure."

Fears about tariffs have sent consumers rushing to stock up on goods to avoid higher prices, helping to power consumer spending, which notched its fastest growth pace in nearly two years in the fourth quarter, sustaining the economic expansion.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.7 per cent in December after an upwardly revised 0.6 per cent rise in November. Spending was previously reported to have gained 0.4 per cent in November.

Goods outlays increased 0.9 per cent, driven by automobiles, food, as well as gasoline and other energy products. Spending on services rose 0.6 per cent amid big gains in housing and utilities, transportation, healthcare and other services.

Economists expect pre-emptive buying continued in January. When adjusted for inflation, consumer spending rose 0.4 per cent, setting the economy on a higher growth trajectory heading into the first quarter.

Personal income increased 0.4 per cent after gaining 0.3 per cent in November. With spending outpacing income, the saving rate fell to a two-year low of 3.8 per cent from 4.1 per cent in November.

Some economists argued that the low saving rate was not conducive to further gains in consumer spending post the tariff-related buying frenzy. Others were not worried.

"We expect consumer spending will continue to be bolstered by strong balance sheets overall, including record amounts of housing wealth," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.