Inflation Firmed, Consumer Spending Jumped in January

U.S. consumers’ spending jumped a seasonally adjusted 1.8% in January from the prior month, the largest increase in nearly two years, as they shelled out for goods such as refrigerators and cars and spent more at restaurants and hotels.

The report was the latest sign of the economy’s surprising vigor last month, after it weakened late last year. That likely motivates Fed officials to raise interest rates to higher levels than they anticipated in December, and to end any discussions of whether to pause increases this spring.

“Inflation is too high,” said Cleveland Fed President

Loretta Mester

in an interview Friday. “My view of the economy hasn’t changed that much. We have inflation pressures that are pretty ‘in there.’”

U.S. stocks moved lower after the report. The Dow Jones Industrial Average fell 337 points, or 1%, on Friday. The blue-chip index was down 3% on the week, the largest weekly decline since September.

The report followed others showing hiring surged in January, while the unemployment rate touched a 53-year low, service providers expanded their activities and initial jobless claims, a proxy for layoffs, remained near historically low levels.

Fed governor

Philip Jefferson

said Friday that he saw greater evidence that the central bank would face a long inflation battle because strong hiring and wage gains could sustain firmer price pressures.

“The ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly,” he said at a conference in New York.

The January spending boom, a reversal from a small spending decline in December, was driven in part by a strong increase in household income, the Commerce report showed.

Wages and salaries grew 0.9% in January, more than twice as fast as in the prior month. Minimum wage increases and other annual raises kick in for many workers in January.

Incomes were also boosted by an inflation-adjustment in Social Security checks at the start of the year, which could help the roughly 70 million recipients spend more. Total Social Security income rose 9% in January compared with December. The personal saving rate increased to 4.7% in January, the highest in a year.

After the inflation report’s release Friday, investors expected the Fed to raise its benchmark federal-funds rate by a quarter point, or 25 basis points, at policy meetings in March, May and June, boosting it to a range of 5.25% to 5.5%, according to CME Group. One month ago, investors anticipated the central bank would stop raising rates after a final increase in March and that it might begin cutting rates later this year.

The Fed raised the fed-funds rate by a quarter point on Feb. 1 to a range of 4.5% to 4.75%, following six consecutive larger increases.

Investors in interest-rate futures markets on Friday saw slightly more than a one-in-three chance that the Fed would raise its benchmark federal-funds rate by a half percentage point, or 50 basis points, at the central bank’s next meeting, March 21-22.

Ms. Mester has said previously that she favored raising rates by a half point at the last meeting because she is confident rates need to rise above 5%. On Friday, she said it was too soon to say whether the central bank should boost the pace of rate increases so soon after slowing it. “This is a different situation now. We’ve already reduced it to 25 [basis points]. That’s going to be part of the consideration,” she said.

She said she didn’t think the debate over how much to raise rates at any particular meeting was as important as the one over how high to lift them over the rest of the year.

The central bank could end up holding interest rates at a higher level for longer than it normally does, said Boston Fed President Susan Collins on Friday.

The Fed raises rates to combat inflation by slowing the economy, which can risk a painful downturn.

Todd Stucke, an executive at tractor and equipment maker

Kubota Corp.

, said higher interest rates are reducing demand for the company’s ride-on lawn mowers. Consumers typically buy new equipment using loans and pay monthly.

“It’s slowing,” he said. “With interest rates up and inflation, those payments are going up.”

On Thursday, the Commerce Department said the U.S. economy grew at a 2.7% annual rate in the fourth quarter, adjusted for seasonality and inflation. It’s a strong pace but slower than in the third quarter. The fourth-quarter expansion was in part driven by a buildup in inventories, which some economists see unwinding this year and weighing on growth.

Many economists expect the Fed’s actions will eventually cool the economy. Forecasting firm S&P Global Market Intelligence on Friday estimated gross domestic product would contract at a 0.3% annual rate in the first three months of the year.

Friday’s report showed that on a monthly basis, the PCE-price index rose 0.6% in January from December, the largest gain since June.

When adjusted for these rising prices, spending rose 1.1% in January from December.

Some consumers are weighing whether to hold off on purchases in hopes high prices will fall, or buy now in case they rise more.

James Linley, a 71-year-old retiree in Fort Lauderdale, Fla., said prices of food and home insurance have increased. High prices have also made him cautious to spend on travel. He said he is preparing to fly his family to a wedding in Spain later this year but has been put off by the $1,500 flights.

“I’m watching the prices and we’re going to have to pull the trigger pretty soon,” he said.

Write to Austen Hufford at austen.hufford@wsj.com and Nick Timiraos at Nick.Timiraos@wsj.com