Washington: USconsumer spending was unchanged in March for a second straight month and a key inflation measure recorded its first monthly drop since 2001, but economists still expect an interest rate increase in June as the labor market tightens.
The Commerce Department report on Monday come ahead of a two-day meeting by the Federal Reserve's policy-setting committee. The US central bank is not expected to raise interest rates at the end of the meeting on Wednesday.
The weak consumer spending and subsiding inflation pressures did little to change expectations of a rate hike in June. Consumer spending accounts for more than two-thirds of US economic activity.
"We don't expect that will prevent the Fed from hiking interest rates again at the June meeting, at least not as long as employment growth rebounds in April and May," said Paul Ashworth, chief US economist at Capital Economics in Toronto.
The Fed lifted its overnight interest rate by a quarter of a percentage point in March and has forecast two more hikes this year. The consumer spending data was included in last Friday's first-quarter gross domestic product report, which showed consumer spending increasing at a 0.3 per cent annual rate — the slowest pace since the fourth quarter of 2009.
The economy grew at a 0.7 per cent rate in the first quarter, the worst performance in three years.
Prices for US government bonds rose on the spending and inflation data, while the dollar fell to a session low against the euro.
The personal consumption expenditures (PCE) price index excluding food and energy slipped 0.1 per cent, the first and largest drop since September 2001, after increasing 0.2 per cent in February. In the 12 months through March, the so-called core PCE price index increased 1.6 per cent, the smallest gain since last July, after advancing 1.8 per cent in February.
The core PCE is the Fed's preferred inflation measure. The US central bank has a 2 per cent target.
"We view the drop in the core PCE price index in March as an aberration and we expect the core inflation rate to creep upwards over the coming months," said said John Ryding, chief economist RDQ Economics in New York.
The overall PCE price index fell 0.2 percent in March. That was the first decline since February 2016 and the biggest drop since January 2015. In the 12 months through March the PCE price index increased 1.8 per cent after rising 2.1 per cent in February.
With price pressures subsiding, inflation-adjusted consumer spending increased 0.3 per cent in March, ending two straight months of decline. March's increase in real consumer spending sets it up for an acceleration in the second quarter.
Consumption will likely be supported by a pick-up in wage growth. A report on Friday showed private sector wages recorded their biggest increase in 10 years in the first quarter.
Overall consumer spending in March was constrained by a 0.7 per cent drop in purchases of long-lasting goods such as automobiles. A cold snap boosted demand for heating, lifting spending on services by 0.4 per cent.
Personal income gained 0.2 per cent in March after rising 0.3 per cent in February. Income at the disposal of households after accounting for inflation increased 0.5 per cent, the biggest gain since December 2015. Savings increased to a one-year high of $849.1 billion from $819.0 billion in February.