Personal income rose in the US and consumers continued to spend freely last month, according to a new government report released on Friday. But at the same time, a crucial measure of inflation inched higher.
Investors were encouraged by the news and seemed to ignore concerns about inflation. The markets rose on Friday, ending the week on an up note.
The US Commerce Department reported that consumer spending rose at a seasonally adjusted annual rate of 0.6 percent in March as income moved up at roughly the same pace.
A measure of inflation that excludes food and energy, which the Fed studies closely to gauge inflation, rose 2.1 percent compared with last April, just above the 2 percent mark the central bank considers healthy.
The Dow Jones industrial average jumped 67.56 points, or 0.6 percent, to 11,278.61. The Standard & Poor's 500-stock index rose 7.28 points, or 0.57 percent, to 1,280.16. The NASDAQ composite index added 12.13 points, or 0.55 percent, to 2,210.37. For the week, the Dow rose 1.21 percent, the S&P 500 gained 1.04 percent and the NASDAQ 0.75 percent.
Yet, some economists said on Friday that rounding of the inflation number might have been the biggest factor influencing investors.
The Commerce Department reported the inflation number for last month as 0.2 percent. However, the actual figure was 0.24968, giving some economists pause.
"What's .001 between friends?" said Stuart Hoffman, chief economist with PNC Financial.
Had that 0.24968 been rounded up to 0.3, which was the number in March, investors probably would have had a different reaction on Friday.
"The economy is slowing down," Hoffman said.
"But at the same time inflation is speeding up. That's why they have a tough call to make. Is rising inflation a bigger threat to sustained economic growth, or is a softer economy a bigger threat?" he said.
The Fed, which will decide late next month whether to raise its benchmark short-term interest rate above 5 percent, will look at inflation against the backdrop of what by most accounts is a slowing economy.
As investors barely blinked at the consumer spending data, they also shrugged off a report that showed consumer confidence is at its lowest point since right after the hurricanes last summer.
The University of Michigan's consumer sentiment index, an indicator of how well the economy will perform in coming months, moved to 79.1 for this month, from 87.4 last month. That is in line with what many economists see as a pattern for the economy for the remainder of the year.
"A gradually softening trend for consumer spending is the most likely scenario in the quarters ahead," Joshua Shapiro, chief US economist at MFR, wrote in a research note, "particularly as housing cools off. The recent steep rise in gasoline prices will not help any as well."
Richard Curtin, director of the Michigan study, called the effect of gas prices on the economy "corrosive," and noted that a large percentage of respondents in the survey's history said gas prices were hurting their financial situations.
"Consumers expect a slowdown in economic growth," Curtin said.
"High gas prices and rising interest rates have finally convinced households to sharply realign their expectations," he said.