Inflation Firmed, Consumer Spending Jumped in January

Spending by U.S. households rose a seasonally adjusted 1.8% in January from the prior month, the largest increase in nearly two years, and a reversal from a small decrease in December. The spending figure adds to evidence that the U.S. economy remains vibrant.

Stronger economic activity and slower progress on inflation than previously expected could keep the central bank raising rates longer than anticipated before the recent reports.

“This is a bump in the road for the Fed,” said Jeremy Schwartz, senior U.S. economist at

Credit Suisse Group AG

. “They have more work to do.”

U.S. stocks moved lower after the report, with investors expecting the Fed to keep ratcheting up rates. The broad S&P 500, the technology-heavy Nasdaq Composite and the blue-chip Dow Jones Industrial Average all shed more than 1% Friday morning.

The Fed has been raising interest rates to push down inflation. At the start of February, officials raised short-term interest rates by a quarter-percentage point to a level last reached in 2007. They expect to keep raising rates this year, according to the minutes of their most recent gathering, released Wednesday.

The PCE-price index rose 0.6% in January compared with December. That was the largest monthly gain since June. Core prices also rose 0.6% in January from the prior month, compared with December’s 0.4% increase. Many economists see the core measure as a better predictor of future inflation.

Prices for goods and services both increased in January from December. Energy prices advanced 2% and food prices rose 0.4%.

When adjusted for these rising prices, spending rose 1.1% in January from December. Inflation-adjusted spending on long-lasting goods, such as refrigerators and cars, rose 5.2% in January, and followed spending declines in four of the past five months.

Household income rose 0.6% in January from the prior month. Incomes were 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 income from social security rose 9% in January compared with December.

The personal saving rate increased to 4.7% in January from 4.5% in December.

The readings add to other recent data showing Americans increased spending at retailers and restaurants in January by the most in nearly two years, the unemployment rate touched a 53-year low, service-sector activity expanded, and initial jobless claims, a proxy for layoffs, trending at historically low levels.

“All of the indicators have been pointing to a strengthening economy,” said Eugenio Alemán, chief economist at Raymond James.

Solid demand in the economy is keeping upward pressure on inflation. That poses challenges for both businesses and consumers that are facing higher prices this year, and can expect interest rates to keep rising. That could yet lead to an economic slowdown in 2023.

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.

Some parts of the economy, including home sales and big-ticket purchases, are being affected by higher interest rates.

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, slower than the third quarter’s 3.2% rate. The fourth-quarter expansion was in part driven by a buildup in inventories, which some economists see unwinding this year and weighing on growth.

Despite recent positive reports, many economists expect the Fed’s actions will cool the economy this year. Forecasting firm S&P Global Market Intelligence on Thursday estimated gross domestic product would contract at a 0.7% rate in the first three months of the year.

Write to Austen Hufford at austen.hufford@wsj.com