Consumer spending declined 0.2 per cent in January following a 0.3 per cent drop in December, the Commerce Department reported Monday. But the weakness in both months was heavily influenced by big declines in gas prices. Excluding price changes, consumer spending rose 0.3 per cent in January and would have been down a smaller 0.1 per cent in December.
Income grew 0.3 per cent in January as wages and salaries increased a strong $42.4 billion and excluding inflation, after-tax incomes shot up 0.9 per cent, the best showing in two years.
Analysts expect that solid job gains and low unemployment will bolster consumer spending and lift economic growth this year to what they predict will be the fastest pace in a decade.
"Even though households didn't take full advantage of their savings on gasoline in January, they still have a lot of scope to increase real consumption in the first half of the year," said Paul Ashworth, chief U.S. economist at Capital Economics.
The combination of falling spending and rising income translated into an increase in the personal saving rate, which climbed to 5.5 per cent of after-tax income, up from 5 per cent in December and the highest level since late 2012.
Inflation, as measured by a gauge tied to consumer spending, fell 0.5 per cent in January, reflecting the big drop in energy prices. Over the past year, inflation is up just 0.2 per cent, well below the Fed's 2 per cent inflation target.
Fed Chair Janet Yellen told Congress last week that the central bank will need to be confident that inflation will rise back to the 2 per cent over the medium term before starting to raise interest rates. Many economists expect the first Fed rate hike will occur in June or September.
The January report is the first look at consumer spending for the first quarter of this year. Economists examine consumer spending closely since it accounts for 70 per cent of economic activity.
The government last week revised its estimate for overall economic growth as measured by the gross domestic product to a slower pace of 2.2 per cent in the October-December quarter, down from an initial estimate of 2.6 per cent growth in the fourth quarter.
The downward revision reflected less spending by businesses to restock their inventories and a bigger trade deficit than initially estimated. Consumer spending remained strong during the fourth quarter, rising at an annual rate of 4.2 per cent. That was the best showing since early 2006.
Economists expect the overall growth this year will top 3 per cent, the best performance in a decade. That optimism is based on a belief that a stronger job market will boost incomes and that will in turn support solid gains in consumer spending.