Consumer spending, inflation data support Fed rate hike case

U.S. consumer spending recorded its biggest increase in four months in April and monthly inflation rebounded, pointing to firming domestic demand that could allow the Federal Reserve to raise interest rates next month.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is likely to remain on solid ground in the wake of other reports on Tuesday that showed confidence among households still at lofty levels despite some slippage this month and strong gains in house prices in March.

“Fed officials can continue with their gradual pace of rate hikes in June as the economy remains on course for stronger growth this quarter and throughout the rest of the year,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The Commerce Department reported that consumer spending increased 0.4 percent last month after an upwardly revised 0.3 percent gain in March as households spent more on both goods and services.

April’s increase was the biggest since December and eased concerns about second-quarter economic growth after weak reports on core capital goods orders, the goods trade deficit and inventory investment in April. Consumer spending was previously reported to have been unchanged in March.

Consumer spending grew at its slowest pace in more than seven years in the first quarter, helping to restrict the increase in gross domestic product to an annual rate of 1.2 percent in the first three months of the year.

Following April’s report and upward revisions to March’s data, economists said consumer spending was running at around a 3 percent rate, a sharp acceleration from the first quarter’s 0.6 percent pace. GDP growth estimates for the second quarter range between a rate of 2 percent and 3.8 percent.

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