U.S. 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 labor 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 U.S. economic activity, increased 0.5 % after an unrevised 0.2 % gain in November.
The increase was in line with economists' expectations. Consumer spending increased 3.8 % in 2016 after a 3.5 % rise in 2015.
When adjusted for inflation, consumer spending increased 0.3 % last month after rising 0.2 % in November.
U.S. stock index futures and prices for longer-maturity U.S. 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 U.S. 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 % to 0.75 %.
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 % annual rate in the fourth quarter, restrained by a wider trade deficit.
Private domestic demand, however, increased at a solid 2.8 % rate. The economy grew at a 3.5 % rate in the third quarter.
Inflatio 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 % after edging up 0.1 % in November.
In the 12 months through December the PCE price index rose 1.6 %, the biggest increase since September 2014. That followed a 1.4 % increase in November.
Excluding food and energy, the so-called core PCE price index ticked up 0.1 % after being unchanged in November. The core PCE price index increased 1.7 % 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 % target. However, other inflation measures are above the PCE price indexes. The consumer price index (CPI) is currently at 2.1 % on a year-on-year basis and the core CPI is up 2.2 %.
Consumer spending last month was buoyed by a 1.4 % jump in purchases of long-lasting manufactured goods such as automobiles. Spending on services increased 0.4 %.
Personal income advanced 0.3 % last month after nudging up 0.1 % in November. Wages and salaries rebounded 0.4 % after slipping 0.1 % in November. Income increased 3.5 % in 2016 after rising 4.4 % in 2015.
Savings fell to $768.4 billion last month, the lowest level since May 2015, from $791.2 billion in November.