Consumption picks up again in the United States, inflation in ambush

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Optimism appears to be resurfacing in the United States, where consumer spending surged in January, as President Joe Biden redoubles his efforts to get his $ 1.9 trillion bailout approved, however, raising fears of overheating economy.

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U.S. consumer spending in January was 5.3% higher than in December, 7.4% higher than in January 2020, according to data released by the Commerce Department on Wednesday.

This increase is the first after three months of decline.

“The only logical explanation (…) is that the second round of stimulus measures hit its target and was spent almost immediately,” said economist Joel Naroff in a note.

The bank accounts of American households have indeed been bailed out a bit by the $ 900 billion stimulus plan adopted in Congress at the end of December and ratified by Donald Trump, after months of negotiations.

Checks of $ 600 per person and extended unemployment benefits enabled them to purchase electronics, furniture and household items, books, musical instruments, sports and recreation items.

Even bars and restaurants, which are particularly hard hit by the crisis, have seen their sales rise for the first time since September.

Too much or too little

For President Joe Biden, we must now do more, and help the world’s leading economy to extricate itself from this unprecedented crisis.

He strongly pleads for a new injection of public money, and has been defending his $ 1,900 billion rescue plan for a month.

Consumption picks up again in the United States, inflation in ambush

The envelope provides for the acceleration of vaccinations against Covid-19, the reopening of schools, aid to businesses and households in difficulty, but also to cities and states of the country so that they do not have to fire their firefighters , police officers and teachers.

The Biden administration believes that it is better to do too much rather than not enough, supported by some economists who consider this assistance essential in particular in the face of unemployment which still affects more than 20 million people.

But others fear a runaway, and a sharp rise in prices, like Larry Summers, former Secretary of the Treasury to Bill Clinton and main economic advisor to Barack Obama, who fears “inflationary pressures unheard of for a generation”.

The question is above all whether this price increase will be lasting or only temporary – linked in particular to a comparison effect with the low prices of spring 2020 and to the runaway after a year of restrictions.

Unprecedented jump in producer prices

The members of the monetary committee of the American Central Bank (Fed), who watch closely the evolution of prices to establish their monetary policy, lean for provisional inflation, according to the minutes of their meeting in January, published on Wednesday.

“Many participants (at the meeting) stressed the importance of distinguishing between one-off changes in prices and changes in the underlying trend of inflation”, details this report.

Thus, according to them, “changes in relative prices could temporarily increase measured inflation, but would probably not have a lasting effect.”

The Fed has insisted that it will keep its rates very low to support the economy until full employment returns and will continue to flood the markets with liquidity via monthly asset purchases to the tune of $ 120 billion. It is even ready for that to accept an inflation temporarily higher than its objective of 2%.

Consumption picks up again in the United States, inflation in ambush

Prices rose 1.3% in 2020 in the United States alone.

The producer price index, that is, the prices paid by manufacturers, climbed 1.3% in January, marking its largest increase since the monitoring of this indicator began in December 2009. The prices of services drove this increase.

“It is unlikely that the pressure on prices will continue, given the excess capacity of the economy,” says Rubeela Farooqi, economist at HFE.

“This rebound reflects a recovery in demand and pressures related to a bottleneck which should stabilize in the coming months”, also believes Mahir Rasheed, of Oxford Economics.

The bond market has sounded a wake-up call since Tuesday, with interest rates on 10-year Treasuries at their highest in almost a year.