US consumer spending grew in April at the fastest pace in three months amid solid income growth.
But a key gauge of inflation watched by the Federal Reserve posted the biggest increase in 13 months.
The Commerce Department reported today that consumer spending jumped 0.6 per cent last month, the best showing since a 0.8 per cent rise in January, while incomes rose by 0.5 per cent, supported by strong wage and salary gains.
However, core inflation, excluding energy and food, was up 2.1 per cent in April compared to the same month a year ago. This was the fastest increase in this inflation gauge since a similar 2.1 per cent 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 per cent to 2 per cent. Although a 2.1 per cent 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 environment raise the risk of over-doing the credit tightening and possibly triggering a recession.