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Consumer spending in the U.S. saw its biggest increase in over six years during April thanks to households stepping up their purchases of vehicles, suggesting an increase in the rate of economic growth that might persuade policy makers at the Federal Reserve to increase their interest rates again.
Although there was other data Tuesday that showed consumer confidence ebbed during May, spending should remain propped up by the strong increases in prices of homes, as well as the strengthening of the U.S. labor market, which is pushing up the wages on a steady basis.
Janet Yellen the Chairwoman of the Fed said last Friday that a hike in interest rates would likely be appropriate during the coming months, if our economy continued picking up as well as the labor market adding new jobs.
Yellen’s views were released online with those expressed in the Fed’s minutes from its policy meeting late in April that was recently published.
The Department of Commerce said that consumer spending, which represents over two thirds of the economic activity of the U.S., surged up by 1% in April as households purchased a number of different goods and services.
April’s increase was the biggest since August of 2009 and it beat the expectations of economists that were for a rise of just 0.7%.
Strong consumption helped lift inflation in April. The PCE or personal consumption expenditures price index, which excludes volatile energy and food components, increased 0.2% after going up just 0.1% during March. That left the complete increase in the core PCE rate year on year at 1.6%
The core PCE is the preferred measure of inflation for the Fed and is at less than the Fed’s target of 2%. Economists expect that inflation will continue to creep up during 2016, citing the fading rally of the dollar and the gradual increase of prices of oil and wages.
Financial markets have priced in a chance of 61% that interest rates will be increased at the policy meeting of the Fed July 26-27.
The U.S. dollar was higher versus a basket of international currencies, while stocks dropped in the U.S. on Tuesday. Prices of government debt in the U.S. changed just slightly.
When consumer spending is adjusted for any inflation, it increased 0.6%, the largest gains since February of 2014, after it had been flat during March.
The strong spending report for consumers added to data on exports, industrial production home starts and home sales suggests the economy had regained momentum following a lackluster first quarter of growth.