Economic Report Highlights Consumer Spending Increase, but Inflation Remains Low Despite Biden’s Efforts

The US economy experienced growth of an upwardly revised 3.4 percent in the fourth quarter.

The latest economic report shows that consumer spending increased by 3.3% in the fourth quarter, driven by stronger spending on healthcare and financial services. Despite this, goods outlays were revised lower. Nonresidential investment also saw an increase, reflecting upward revisions in spending on structures, intellectual property, and equipment.

Despite the rise in consumer spending, the Federal Reserve’s preferred inflation measure, the personal consumption expenditures price index, only rose by 1.8% annually in the fourth quarter, which is the lowest since 2020. Excluding food and energy, the index rose by 2%, slightly below the previous estimate. Recent earnings reports from publicly-traded companies show an increase in gross margins as input costs are finally easing, but this may not necessarily translate to lower prices for consumers.

President Joe Biden has highlighted robust earnings as a sign that companies may be taking advantage of consumers with high prices, particularly in grocery stores. However, more recent economic data suggests that consumers may be becoming more selective in their spending habits after years of demand-driven expenditure. Data on personal consumption expenditures for February is expected to be released on Friday.

Looking ahead, the trajectory of inflation and the labor market will be crucial in determining how long consumers can continue to support economic growth. A separate report indicating an increase in continuing applications for US unemployment benefits in the week ending March 16 also suggests potential challenges in the labor market.

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