Services support consumer spending in the United States; inflation is skyrocketing

WASHINGTON (Reuters) – U.S. consumer spending rose in June as COVID-19 vaccinations boosted demand for travel-related services, but part of the increase reflected higher prices, the annual inflation accelerating further above the Federal Reserve’s 2% target.

Although personal income barely increased last month, other data released on Friday showed second-quarter wage growth to be the fastest in 13 years on a year-over-year basis. That, combined with increasing household wealth and plentiful savings, is expected to keep consumer spending high, although rising COVID-19 infections pose a risk.

“The overall trend of healthy to strong growth will continue next year,” said Scott Hoyt, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “The downside risks remain significant. The return of stoppages due to increased infections is unlikely, but cannot be ruled out. There are also upside risks, especially given all the additional savings since spring 2020. ”

Consumer spending, which accounts for more than two-thirds of US economic activity, rebounded 1.0% last month after falling 0.1% in May, the Commerce Department said. Economists polled by Reuters predicted a 0.7% increase in consumer spending.

(Graphic: Personal consumption:)

Nearly half of the population has been vaccinated against COVID-19, allowing Americans to travel, eat out, visit casinos and attend sporting events among service-related activities that have been curbed in the start of the pandemic.

Spending on services rose 1.2% last month. The general increase was led by spending in restaurants and hotels.

While spending on goods remains strong, the pace has slowed due to shortages of motor vehicles and some household appliances, the production of which has been hampered by tight supplies of semiconductors across the world. Demand is also shifting towards services from goods. Amazon.com Inc said on Thursday that sales growth would slow over the next few quarters as customers venture further outside of their homes.

Spending on goods rose 0.5%. Spending on durable goods fell 1.5%, reflecting lower purchases of motor vehicles. Spending on non-durable goods rose 1.8%.

The data was included in the second quarter gross domestic product report released on Thursday. Consumer spending grew at a robust annualized rate of 11.8% in the last quarter, accounting for much of the economy’s growth pace of 6.5%, pushing the level of GDP to- above its peak in the fourth quarter of 2019.

As demand exceeds supply, inflation rises.

The personal consumption expenditure price index (PCE), excluding the volatile components of food and energy, rose 0.4% in June after advancing 0.5% in May. The so-called basic PCE price index was inflated by rising prices for airline tickets, used cars, and hotel and motel accommodation.

In the 12 months to June, the core PCE price index climbed 3.5%, the largest gain since December 1991, after increasing 3.4% in May. The core PCE price index is the Federal Reserve’s preferred inflation measure for its flexible target of 2%.

“Price pressures are centered on areas that are having difficulty reopening. Some of these areas are simply inflating prices before the pandemic; others should see prices drop as they adjust capacity and resolve supply chain issues, ”said Will Compernolle, senior economist at FHN Financial in New York City. “Even with modest monthly increases in PCE prices for next year, year-over-year readings will be high for some time.”

Consumers are taking notice of rising inflation, which is eroding sentiment.

Wall Street stocks were trading lower. The dollar appreciated against a basket of currencies. US Treasury yields have fallen.

(Graphic: UMich:)

INCREASING WAGES

The US central bank on Wednesday kept its overnight key rate close to zero and left its bond buying program unchanged.

Excluding inflation, consumer spending rebounded 0.5% in June after falling 0.6% in May. The rebound in so-called real consumer spending last month puts it on a higher growth path as the third quarter approaches.

Personal income rose 0.1% in June after falling 2.2% in May on lower government transfers. The savings rate fell to a still high 9.4% from 10.3% in May, which should support spending as the flow of public money dries up.

Households accumulated at least $ 2.5 trillion in excess savings during the pandemic. Record stock prices and acceleration in house prices are bolstering household wealth. Wages are also rising as companies compete for scarce labor.

In a separate report released on Friday, the Labor Department said its employment cost index, the broadest measure of labor costs, rose 0.7% in the last quarter after gaining 0.9% during the period January-March. This brought the year-over-year rate of increase to 2.9%, the largest gain since the fourth quarter of 2018, from 2.6% in the first quarter.

Wages and salaries rose 0.9% after increasing 1.0% in the first quarter. They are up 3.2% over one year, the largest increase since the second quarter of 2008, after increasing by 2.7% in the first quarter. The wage gains were led by the leisure and hospitality sector.

(Graph: Labor costs:)

The economy is facing a labor shortage, with a record 9.2 million vacancies at the end of May. About 9.5 million people are officially unemployed. The lack of affordable child care and fears of contracting the coronavirus have been blamed for keeping workers, mostly women, at home. There have also been retirements linked to the pandemic as well as career changes.

Republicans and business groups blamed improved unemployment benefits, including a weekly $ 300 check from the federal government, for the labor shortage.

“We need to prepare for the labor supply constraints that keep strong upward pressure on compensation costs in the second half of 2021,” said Oren Klachkin, chief US economist at Oxford Economics in New York. . “Better sanitary conditions and reopening will only gradually equalize the imbalance between a high demand for labor and the limited supply of workers.”