WASHINGTON- US consumer spending fell in December, suggesting the economy lost speed heading into the new year amid snarled supply chains and raging COVID-19 infections, while annual inflation increased at a pace last seen nearly 40 years ago.
Wage inflation is also building up amid an acute shortage of workers. Private industry wages rose strongly in the fourth quarter, posting their largest annual gain since the mid-1980s, other data showed on Friday. Mounting inflation pressures could force the Federal Reserve to aggressively hike interest rates, stifling growth, economists warned.
“No one wants to go back to the 80s, but the economy is. Can stagflation from an overly aggressive Fed be next?” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed let its guard down and now they risk it all by saying they might have to move faster and higher on interest rates.”
Consumer spending, which accounts for more than two-thirds of US economic activity, dropped 0.6 percent last month after gaining 0.4 percent in November, the Commerce Department said. The decline was in line with economists’ expectations.
The data was included in the advance gross domestic product report for the fourth quarter published on Thursday. The economy grew at a 6.9 percent annualized rate last quarter, accelerating from the July-September quarter’s 2.3 percent pace. That helped to boost growth in 2021 to 5.7 percent, the strongest since 1984. The economy contracted 3.4 percent in 2020.
Consumer spending dropped in December likely as the result of Americans starting their holiday shopping in October for fear of empty shelves at stores because of rampant shortages of goods, including motor vehicles. Spending on goods fell 2.6 percent, led by automobiles.
Outlays on services gained 0.5 percent, lifted by healthcare.
Sky-rocketing coronavirus infections driven by the Omicron variant slowed the improvement in supply chains, with workers calling in sick. Worsening shortages kept inflation elevated last month.
The personal consumption expenditures (PCE) price index excluding the volatile food and energy components, rose 0.5 percent after a similar gain in November. The so-called core PCE price index accelerated 4.9 percent year-on-year in December, the biggest rise since September 1983. The core PCE price index increased 4.7 percent in the 12 months through November.
Stocks on Wall Street were lower. The dollar was steady against a basket of currencies. US Treasury prices rose.
Inflation is running way above the Fed’s flexible 2 percent target. The US central bank on Wednesday said it was likely to raise interest rates in March.
Bank of America Securities is predicting seven rate hikes this year. JPMorgan on Friday raised its forecast to five rate increases from four.
“The challenge now is to tamp down inflation without allowing the flame on the overall economy to go out,” said Diane Swonk, chief economist at Grant Thornton in Chicago.
“There is no road map for doing this after inflation has surged.”
Signs that inflation could remain stubbornly high were reinforced by a separate report from the Labor Department on Friday showing the Employment Cost Index, the broadest measure of labor costs, rose 1.0 percent in the fourth quarter after increasing 1.3 percent in the July-September period.
Labor costs surged 4.0 percent on a year-on-year basis, the largest rise since the fourth quarter of 2001, after increasing 3.7 percent in the third quarter.
The ECI is widely viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes.
The labor market is viewed as being at or near maximum employment. There were 10.6 million job openings at the end of November.
Wages and salaries rose 1.1 percent last quarter after increasing 1.5 percent in the third quarter. They were up 4.5 percent year-on-year, the largest increase since the second quarter of 1990. Private industry wages rose 1.2 percent and shot up 5.0 percent year-on-year, the most since the first quarter of 1984. Benefits for all workers rose 0.9 percent after a similar gain in the July-September quarter.
But high inflation is cutting into wage gains, eroding consumers’ purchasing power. The rising cost of living and pandemic fatigue pushed consumer sentiment back to a 10-year low in January.
The report from the Commerce Department showed consumer spending adjusted for inflation dropped 1.0 percent in December after slipping 0.2 percent in November.
The decline in the so-called real consumer spending set consumption on a slower growth trajectory heading into the first quarter, which could pull overall economic growth lower.
