Despite the looming threat of higher taxes and the fiscal cliff, retail spending rose 0.5 percent in December, surpassing economists’ predictions of a 0.2 percent gain.
Inflation pressures remain subdued throughout the month and wholesale prices declined for the third straight month in December, which may allow the Federal Reserve to maintain its monetary policy, according to Reuters.
Core sales, which exclude gasoline, building materials and automobiles, increased for the second straight month by 0.6 percent in December. The solid increase in core sales indicates that consumer spending rose in the fourth quarter after rising at an annual 1.6 percent from July through September.
Consumers dared to spend even in the face of the fiscal cliff, $600 billion of automatic government spending cuts and tax hikes scheduled to take effect at the beginning of 2013. Though Congress managed to avoid the fiscal cliff, Americans are likely to see a decrease in their take-home pay in 2013.
“We expect a pullback in consumption spending as consumers adjust to higher payroll taxes and higher taxes for upper income households that eat into disposable income,” Joshua Dennerlein, an economist at Bank of America Merrill Lynch, said, Reuters reports.
Economists predict that the tax increases could reduce consumer spending by as much as 1.2 percent in the first quarter of 2013, with consumer spending growing at only 0.5 percent during the first three months of the year.
Additionally, economists said that inflation combined with slow growth during the first half of 2013 should influence the Federal Reserve to stick to its monetary policy.
“Inflation is a worry for another day,” Ryan Sweet, a senior economist at Moody’s Analytics, said, according to Reuters. “The tame inflation data and expectations of weak GDP data suggests that the Fed is going to continue to purchase assets through most of this year and probably extend it to early 2014.”