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WASHINGTON – U.S. consumer spending was unchanged in March, while underlying inflation pressures remained strong, which could see the Federal Reserve raising interest rates again next month.
The unchanged reading in consumer spending last month, reported by the Commerce Department on Friday, followed a downwardly revised 0.1% gain in February. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was previously reported to have increased 0.2% in February. Economists polled by Reuters had forecast consumer spending dipping 0.1%.
The data was included in the advance gross domestic product report for the first quarter published on Thursday, which showed consumer spending surging at a 3.7% annualized rate that period after rising at a 1.0% pace in the October-December quarter.
The overall economy grew at a 1.1% pace as the acceleration in consumer spending was offset by businesses liquidating inventories in anticipation of weaker demand later this year. The economy expanded at a 2.6% rate in the fourth quarter.
Last month's flat reading in consumer spending set consumption on a lower growth path in the second quarter. It likely reflected Americans becoming more averse to higher prices as well as the expiration of a temporary boost to the Supplemental Nutrition Assistance Program (SNAP) benefits authorized by the U.S. Congress to cushion low-income people and families against the hardships of the COVID-19 pandemic.
SNAP is commonly known as food stamps. Researchers from the Commerce Department's Census Bureau on Thursday estimated the end of the extra benefits had resulted in roughly 32 million people getting smaller monthly SNAP payments. They estimated that a household of four with a net monthly income of $2,000 was now getting $600 less in food stamps each month.
The economy is facing several headwinds, including higher interest rates as the Fed fights inflation, and tightening credit conditions, which could crimp both consumer and business spending. A standoff to raise the federal government's $31.4 trillion borrowing cap also poses a threat.
The Fed is expected to increase interest rates by another 25 basis points next week, potentially the last hike in the U.S. central bank's fastest monetary policy tightening cycle since the 1980s. The Fed has raised its policy rate by 475 basis points since March of last year from the near-zero level to the current 4.75%-5.00% range.
Though inflation remains elevated, it is gradually slowing. The personal consumption expenditures (PCE) price index gained 0.1% in March after rising 0.3% in February. In the 12 months through March, the PCE price index increased 4.2% after climbing 5.1% in February.
Excluding the volatile food and energy components, the PCE price index rose 0.3% after increasing 0.3% in February. The so-called core PCE price index gained 4.6% on a year-on-year basis in March after rising 4.7% in February. The Fed tracks the PCE price indexes for its 2% inflation target.