By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending rose solidly in December as households bought motor vehicles and a range of services amid rising wages, pointing to sustained domestic demand that could spur faster economic growth in early 2017.
There are also signs of inflation steadily firming. The strengthening economy, rising price pressures and a tightening labor market could allow the Federal Reserve to lift interest rates at least three times this year.
The Commerce Department said on Monday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.5 percent after an unrevised 0.2 percent gain in November.
The increase was in line with economists' expectations. Consumer spending increased 3.8 percent in 2016 after a 3.5 percent rise in 2015.
When adjusted for inflation, consumer spending increased 0.3 percent last month after rising 0.2 percent in November.
U.S. stock index futures and prices for longer-maturity U.S. Treasuries were lower. The dollar <.DXY> was firmer against a basket of currencies.
The report was released ahead of the Fed's two-day policy meeting that begins on Tuesday. The U.S. central bank, which has forecast three rate hikes this year, is not expected to raise rates at this week's meeting. The Fed lifted its benchmark overnight interest rate in December by 25 basis points to a range of 0.50 percent to 0.75 percent.
The consumer spending, income and inflation data for December was included in the fourth-quarter gross domestic product report published last Friday. The economy grew at a 1.9 percent annual rate in the fourth quarter, restrained by a wider trade deficit.
Private domestic demand, however, increased at a solid 2.8 percent rate. The economy grew at a 3.5 percent rate in the third quarter.
INFLATION TICKING UP
With domestic demand rising, inflation showed some signs of picking up last month. The personal consumption expenditures (PCE) price index rose 0.2 percent after edging up 0.1 percent in November.
In the 12 months through December the PCE price index rose 1.6 percent, the biggest increase since September 2014. That followed a 1.4 percent increase in November.
Excluding food and energy, the so-called core PCE price index ticked up 0.1 percent after being unchanged in November. The core PCE price index increased 1.7 percent on a year-on-year basis after a similar gain in November.
The core PCE is the Fed's preferred inflation measure and is running below its 2 percent target. However, other inflation measures are above the PCE price indexes. The consumer price index (CPI) is currently at 2.1 percent on a year-on-year basis and the core CPI is up 2.2 percent.
Consumer spending last month was buoyed by a 1.4 percent jump in purchases of long-lasting manufactured goods such as automobiles. Spending on services increased 0.4 percent.
Personal income advanced 0.3 percent last month after nudging up 0.1 percent in November. Wages and salaries rebounded 0.4 percent after slipping 0.1 percent in November. Income increased 3.5 percent in 2016 after rising 4.4 percent in 2015.
Savings fell to $768.4 billion last month, the lowest level since May 2015, from $791.2 billion in November.
(Reporting by Lucia Mutikani; Editing by Paul Simao)