WASHINGTON – Consumer spending grew in April at the fastest pace in three months, supported by solid income growth. But in a worrisome development, a key gauge of inflation watched by the Federal Reserve posted the biggest increase in 13 months.
The Commerce Department reported Friday that consumer spending jumped 0.6 percent last month, the best showing since a 0.8 percent rise in January, while incomes rose by 0.5 percent, supported by strong wage and salary gains.
However, core inflation, excluding energy and food, was up 2.1 percent in April compared to the same month a year ago. This was the fastest increase in this inflation gauge since a similar 2.1 percent increase for the 12 months ending in March 2005 and was above the Fed's comfort zone for inflation.
The Fed conducts policy with a goal of keeping inflation excluding energy and food rising at an annual rate of 1 percent to 2 percent. While a 2.1 percent reading is only slightly above that target level, financial markets have grown concerned in recent weeks that the central bank may keep raising rates at coming meetings because inflationary pressures have begun to mount.
The concern is that big increases in oil prices this year could now be spilling over into other areas of the economy, upsetting the calm inflation environment that the Fed seeks to maintain as a way to spur economic growth.
To keep inflation under control, the Fed increases short-term interest rates to slow borrowing and economic activity. The Fed has boosted a key rate at 16 consecutive meetings over the past two years with the big question now being whether it will call a pause at its next meeting at the end of June or keep raising rates.
Some economists worry that the Fed could be caught in a bind with inflation rising but the economy already starting to slow. Too many rate increases in such an enviornment raise the risk of over-doing the credit tightening and possibly triggering a recession.
The 0.5 percent increase in incomes in April matched the gain in March and was propelled by a 0.9 percent rise in wages and salaries, the biggest such increase in a year.