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U.S. consumer spending slows; inflation pushes higher

WASHINGTON, U.S. consumer spending rose less than expected in January as the largest monthly increase in inflation in four years eroded households' purchasing power, pointing to moderate economic growth in the first quarter. The Commerce Department said on Wednesday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2 percent after an unrevised 0.5 percent rise in December. Economists polled by Reuters had forecast consumer spending gaining 0.3 percent in January. Consumer spending is likely to remain supported amid promises by the Trump administration of sweeping tax cuts and increased infrastructure spending. In a speech to Congress on Tuesday night, President Donald Trump said his economic team was working on a "historic tax reform that will reduce the tax rate on our companies" and promised a "massive" tax relief for the middle class. Trump offered no further details. Consumer confidence has surged following Trump's election victory, hitting a 15-1/2-year high in February. In January the personal consumption expenditures (PCE) price index increased 0.4 percent - the largest gain since February 2013 - after rising 0.2 percent in December. In the 12 months through January, the PCE price index jumped 1.9 percent. That was the biggest year-on-year gain since October 2012 and followed a 1.6 percent increase in December.

Excluding food and energy, the so-called core PCE price index rose 0.3 percent in January. That was the biggest increase since January 2012 and followed a 0.1 percent gain in December. The core PCE price index increased 1.7 percent year-on-year after a similar gain in December. The core PCE is the Federal Reserve's preferred inflation measure and is running below its 2 percent target. Inflation is now in the upper end of the range that Fed officials in December felt would be reached this year. Rising price pressures, however, suggest that consumer spending will probably not provide a big boost to gross domestic

product in the first quarter. When adjusted for inflation, consumer spending fell 0.3 percent in January, the first drop since August, after rising 0.3 percent in December. Consumer spending increased at a 3.0 percent annualized rate in the fourth quarter, helping to blunt some of the impact on the economy from a wider trade deficit. The economy grew at a 1.9 percent rate in the fourth quarter.

Consumer spending in January was held back by a 0.3 percent drop in purchases of long-lasting manufactured goods such as automobiles. Spending on services was unchanged. Personal income rose 0.4 percent in January after gaining 0.3 percent in December. Income at the disposal of households after accounting for inflation and taxes, fell 0.2 percent.

U.S. existing home sales rise to 10 year high

U.S. home resales surged to a 10-year high in January as buyers shrugged off higher prices and mortgage rates, a sign of growing confidence in the economy. The National Association of Realtors said on Wednesday existing home sales jumped 3.3 percent to a seasonally adjusted annual rate of 5.69 million units last month. That was the highest level since February 2007. December's sales pace was revised up to 5.51 million units from the previously reported 5.49 million units. Economists had forecast sales rising 1.1 percent to a pace of 5.54 million units in January. The NAR also revised sales data going back to 2014. The revisions were minor and had no impact on the characterization of the housing market. Prices for U.S. government debt slipped after the data, while the dollar . DXY was little changed against a basket of currencies. The PHLX housing index . HGX rose 0.6 percent, outperforming the broader U.S. stock market. Home resales were up 3.8 percent from January 2016. Demand for housing is being underpinned by a strengthening labor market, which is improving employment opportunities for young adults and, in turn, boosting household formation. A persistent shortage of properties available for sale, which is lifting house prices, remains an obstacle to a robust housing market. While the 30-year fixed mortgage rate appears to be stabilizing after rising rapidly in recent months, it still remains above 4 percent. In contrast, annual wage growth is running below 3 percent. Economists expect home sales to slow this year.

INVENTORY GAP The number of homes on the market rose 2.4 percent to 1.69 million units in January. The housing inventory, however, was down 7.1 percent from a year ago and has now declined for 20 straight months on a year-on-year basis.

Economists say homebuilders are struggling to plug the inventory gap because of difficulties securing funding as well as shortages of land and labor. The NAR estimates housing starts and completions should be in a range of 1.5 million to 1.6 million units to alleviate the chronic shortage. Housing starts are running above a rate of 1.2 million units and completions around a pace of 1 million units. With fewer homes available for sale, house prices maintained their ascent last month. The median house price increased 7.1 percent from a year ago to $228,900 in January. That was the biggest increase since January 2016. Last month, existing home sales rose in the Northeast, the West and South. They fell 1.5 percent in the Midwest. At January's sales pace, it would take 3.6 months to clear the stock of houses on the market. That was unchanged from December.

A six-month supply is viewed as a healthy balance between supply and demand. The tight supply meant that house prices recorded their 59th consecutive month of year-on-year gains in January. The higher prices are increasing equity for homeowners and might encourage some to put their homes on the market, but could help to sideline first-time buyers from the market. First-time buyers accounted for 33 percent of transactions last month, well below the 40 percent share that economists and realtors say is needed for a robust housing market. That was up from 32 percent in December and a year ago.