Weaker U.S consumer spending, rising inflation pose dilemma for Fed

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 nearly 40 years ago.

Wage inflation is also building up amid an acute shortage of workers. Private industry wages rose strongly in the fourth quarter, posting their largest annual gain since the mid-1980s, other data showed on Friday. Mounting inflation pressures could force the Federal Reserve to aggressively hike interest rates, stifling growth, economists warned.

"No one wants to go back to the 80s, but the economy is. Can stagflation from an overly aggressive Fed be next?" said Christopher Rupkey, chief economist at FWDBONDS in New York. "The Fed let its guard down and now they risk it all by saying they might have to move faster and higher on interest rates."

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, the Commerce Department said. The decline was in line with economists' expectations.