(Adds details, analyst comments, markets)
* Consumer spending falls 0.6% in December
* Core PCE price index rises 0.5%; up 4.9% year-on-year
* Wages gain 1.1% in Q4; surge 4.5% year-on-year
WASHINGTON, Jan 28 (Reuters) - U.S. 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 U.S. economic activity, dropped 0.6% last month after gaining
0.4% 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% annualized rate last quarter, accelerating from
the July-September quarter's 2.3% pace. That helped to boost
growth in 2021 to 5.7%, the strongest since 1984. The economy
contracted 3.4% 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%,
led by automobiles.
Outlays on services gained 0.5%, 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
The personal consumption expenditures (PCE) price index
excluding the volatile food and energy components, rose 0.5%
after a similar gain in November. The so-called core PCE price
index accelerated 4.9% year-on-year in December, the biggest
rise since September 1983. The core PCE price index increased
4.7% in the 12 months through November.
Stocks on Wall Street were lower. The dollar was steady
against a basket of currencies. U.S. Treasury prices rose.
WAGE PRESSURES GROWING
Inflation is running way above the Fed's flexible 2% target.
The U.S. 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% in the fourth quarter after increasing
1.3% in the July-September period.
Labor costs surged 4.0% on a year-on-year basis, the largest
rise since the fourth quarter of 2001, after increasing 3.7% 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
Wages and salaries rose 1.1% last quarter after increasing
1.5% in the third quarter. They were up 4.5% year-on-year, the
largest increase since the second quarter of 1990. Private
industry wages rose 1.2% and shot up 5.0% year-on-year, the most
since the first quarter of 1984. Benefits for all workers rose
0.9% 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
The report from the Commerce Department showed consumer
spending adjusted for inflation dropped 1.0% in December after
slipping 0.2% 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.
Consumer spending rose at a 3.3% rate last quarter. Growth
forecasts for the first quarter are so far below a 2% rate, with
some economists predicting an outright decline in output.
Still, growth is expected to rebound by the second quarter
as the current Omicron wave of infections subsides and supply
constraints ease. Consumers are sitting on more than $2 trillion
in excess savings accumulated during the pandemic.
It is, however, unclear when and how much of these savings
will be spent. Economists also note that the bulk of the savings
are by higher income households, who tend to be savers and some
of the money could go towards retirement.
"To our minds, despite the strength of price and wage
inflation, it is disappointingly weak real economic growth that
will prevent the Fed from delivering a full-blown Ratemaggedon
this year," said Paul Ashworth, chief U.S. economist at Capital
Economics in Toronto.
(Reporting by Lucia Mutikani
Editing by Chizu Nomiyama)