US consumer spending rose solidly in December as households bought motor vehicles and a range of services amid rising wages, pointing to sustained domestic demand that could spur faster economic growth in early 2017.
There are also signs of inflation steadily firming. The strengthening economy, rising price pressures and a tightening labour market could allow the Federal Reserve to lift interest rates at least three times this year.
The Commerce Department said on Monday that consumer spending, which accounts for more than two-thirds of US activity, increased 0.5 per cent after an unrevised 0.2 per cent gain in November.
The increase was in line with economists' expectations. Consumer spending increased 3.8 per cent in 2016 after a 3.5 per cent rise in 2015.
When adjusted for inflation, consumer spending increased 0.3 per cent last month after rising 0.2 per cent in November.
US stock index futures and prices for longer-maturity US Treasuries were lower. The dollar was firmer against a basket of currencies.
The report was released ahead of the Fed's two-day policy meeting that begins on Tuesday. The US central bank, which has forecast three rate hikes this year, is not expected to raise rates at this week's meeting. The Fed lifted its benchmark overnight interest rate in December by 25 basis points to a range of 0.50 per cent to 0.75 per cent.
The consumer spending, income and inflation data for December was included in the fourth-quarter gross domestic product report published last Friday. The economy grew at a 1.9 percent annual rate in the fourth quarter, restrained by a wider trade deficit.
Private domestic demand, however, increased at a solid 2.8 percent rate. The economy grew at a 3.5 per cent rate in the third quarter.
Inflation ticking up
With domestic demand rising, inflation showed some signs of picking up last month. The personal consumption expenditures (PCE) price index rose 0.2 per cent after edging up 0.1 per cent in November.
In the 12 months through December the PCE price index rose 1.6 per cent, the biggest increase since September 2014. That followed a 1.4 per cent increase in November.
Excluding food and energy, the so-called core PCE price index ticked up 0.1 per cent after being unchanged in November. The core PCE price index increased 1.7 per cent on a year-on-year basis after a similar gain in November.
The core PCE is the Fed's preferred inflation measure and is running below its 2 per cent target. However, other inflation measures are above the PCE price indexes. The consumer price index (CPI) is currently at 2.1 per cent on a year-on-year basis and the core CPI is up 2.2 per cent.
Consumer spending last month was buoyed by a 1.4 per cent jump in purchases of long-lasting manufactured goods such as automobiles. Spending on services increased 0.4 per cent.
Personal income advanced 0.3 per cent last month after nudging up 0.1 per cent in November. Wages and salaries rebounded 0.4 percent after slipping 0.1 per cent in November. Income increased 3.5 per cent in 2016 after rising 4.4 per cent in 2015.
Savings fell to $768.4 billion last month, the lowest level since May 2015, from $791.2 billion in November.