U.S. consumer spending falls in December; inflation increases

WASHINGTON, Jan 28 (Reuters) - U.S. consumer spending fell in December, suggesting the economy lost speed heading into the new year amid snarled supply chains and raging COVID-19 infections, while annual inflation increased at a pace last seen in the early 1980s.

The Commerce Department said on Friday consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.6% last month after gaining 0.4% in November. Economists polled by Reuters had forecast consumer spending declining 0.6%.

The data was included in the advance gross domestic product report for the fourth quarter published on Thursday. The economy grew at a 6.9% annualized rate last quarter, accelerating from the July-September quarter's 2.3% pace.

That boosted growth in 2021 to 5.7%, the strongest since 1984. The economy contracted 3.4% in 2020.

Consumer spending dropped, likely the result of Americans starting their holiday shopping in October for fear of empty shelves at stores because of rampant shortages of goods, including motor vehicles. Skyrocketing coronavirus infections driven by the Omicron variant also reduced traffic to places like restaurants and bars, as well as other high contact venues.

The shortages owing to overstretched supply chains kept inflation elevated last month. The personal consumption expenditures (PCE) price index increased 0.4% after rising 0.6% in November. In the 12 months through December, the PCE price index increased 5.8%. That was the largest advance since 1982 and followed a 5.7% year-on-year increase in November.

Excluding the volatile food and energy components, the PCE price index rose 0.5% after a similar gain in November. The so-called core PCE price index accelerated 4.9% year-on-year in December, the biggest rise since 1983. The core PCE price index increased 4.7% in the 12 months through November.

Inflation is running way above the Federal Reserve's flexible 2% target. The Fed on Wednesday said it was likely to raise interest rates in March. (Reporting by Lucia Mutikani Editing by Chizu Nomiyama)