U.S. consumer spending beats forecasts in March; inflation soars

© Reuters. FILE PHOTO: Shoppers browse in a supermarket in north St. Louis, Missouri, U.S. April 4, 2020. REUTERS/Lawrence Bryant/File Photo

WASHINGTON (Reuters) - U.S. consumer spending increased more than expected in March amid strong demand for services, while monthly inflation surged by the most since 2005.

The Commerce Department said on Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 1.1% last month. Data for February was revised higher to show outlays advancing 0.6% instead of 0.2% as previously reported.

Economists polled by Reuters had forecast consumer spending increasing 0.7%. Part of the rise in spending was due to higher prices. Still, consumer spending is heading into the second quarter with strong momentum, which showcases the economy's underlying strength.

The data was included in the advance first-quarter gross domestic product report on Thursday, which showed the economy contracting at a 1.4% annualized rate because of a wider trade deficit. This was due to surging imports, and a slower pace of inventory accumulation relative to the fourth quarter's robust rate.

Consumer spending picked up last quarter, combining with business investment to boost domestic demand.

The personal consumption expenditures (PCE) price index shot up 0.9% in March, the largest gain since 2005, after climbing 0.5% in February. In the 12 months through March, the PCE price index jumped 6.6%. That was the largest annual gain since 1982 and followed a 6.3% year-on-year increase in February.

March, however, likely marked the peak in the PCE price index. Economists expect the increase in the annual PCE price index to start slowing in the coming months as last year's large gains drop out of the calculation.

In addition, the shift in spending back to services from goods is also seen easing pressure on supply chains.

Excluding the volatile food and energy components, the PCE price index rose 0.3% after a similar gain in February. The so-called core PCE price index increased 5.2% year-on-year in March. The core PCE price index accelerated 5.3% in the 12 months through February.

Annual inflation by all measures has overshot the Federal Reserve's 2% target and the U.S. central bank is expected to hike interest rates by 50 basis points next Wednesday. The Fed raised its policy interest rate by 25 basis points in March, and is soon likely to start trimming its asset holdings.