U.S. consumer spending, inflation rise in August

U.S. consumer spending increased slightly more than expected in August as households went on vacation and dined out, keeping the economy on solid ground as the third quarter progressed, while inflation continued to steadily pick up.

The report from the Commerce Department on Friday suggested the economy has so far retained most of its momentum from the April-June quarter. Signs of the economy’s resilience evident in other data this week showing low layoffs and strong demand by businesses for equipment would argue against the Federal Reserve cutting interest rates again this year.

U.S. reports stronger-than-expected second-quarter economic growth

But the hiring side of the labor market is struggling, with job growth almost stalling in the last three months amid a lingering drag from trade policy uncertainty as well as an immigration crackdown that has reduced the supply of workers.

“There is no support in this report for (Fed Governor) Stephen Miran’s suggestions that policy interest rates have to be cut right away, and by a lot,” said Carl Weinberg, chief economist at High Frequency Economics. “Indeed, there is no recommendation in these numbers for any easing of monetary conditions at all!”

Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.6 per cent last month after an unrevised 0.5 per cent advance in July, the Commerce Department’s Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending increasing 0.5 per cent.

Spending was boosted by outlays on services like transportation, which includes airline travel. Consumers frequented restaurants and bars, and also stayed at hotels and motels. They also boosted spending on recreation services.

Outlays on financial services and insurance rose as did those on healthcare, housing and utilities. Spending on services advanced 0.5 per cent, matching July’s gain.

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Households also bought recreational goods and vehicles, clothing and footwear, and spent more on gasoline and other energy goods as well as food and beverages. Goods outlays shot up 0.8 per cent after rising 0.6 per cent in July.

Spending has marched ahead despite the significant slowdown in the labour market. Consumption is being driven by high-income households as a robust stock market and still-elevated home prices boost their wealth. Fed data this month showed household wealth jumped to a record US$176.3 trillion in the second quarter.

But lower-income households are struggling, and bearing a large share of the burden from higher prices on goods from import tariffs. More pain lies ahead when cuts to the federal government’s Supplemental Nutrition Assistance Program, commonly known as food stamps, take effect.

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The dollar slipped against a basket of currencies. U.S. Treasury yields were little changed.

Economists expect spending will slow

Personal income rose 0.4 per cent last month after a similar gain in July. A 0.6 per cent increase in government transfers accounted for much of the rise in income, with wages rising only 0.3 per cent.

Strong consumer spending contributed to gross domestic product growing at a 3.8-per-cent annualized rate in the second quarter, the fastest in nearly two years. Before the consumer spending data, the Atlanta Fed was forecasting GDP rising at a 3.3-per-cent rate in the third quarter.

Economists expect spending to slow considerably by the end of the year, undercut by higher prices.

Inflation rising steadily

Though there has not been a broad rise in inflation, there has been a surge in prices of some goods exposed to tariffs. Businesses have been selling inventory accumulated before President Donald Trump’s sweeping tariffs kicked in, preventing inflation from spiraling.

Producers have also been absorbing some of the duties. Economists, however, do not expect this trend to continue indefinitely and expect businesses will at some point pass on the tariffs to consumers on a wider scale. Inventories were drawn down in the second quarter.

The Personal Consumption Expenditures (PCE) Price Index increased 0.3 per cent in August after gaining 0.2 per cent in July, the BEA said. In the 12 months through August, the PCE Price Index advanced 2.7 per cent. That was the biggest year-on-year increase since February and followed a 2.6-per-cent rise in July.

Excluding the volatile food and energy components, the PCE Price Index rose 0.2 per cent last month after increasing 0.2 per cent in July. In the 12 months through August, the so-called core inflation index increased 2.9 per cent after rising 2.9 per cent in July.

The Fed tracks the PCE price measures for its 2-per-cent inflation target. The U.S. central bank last week resumed policy easing, cutting its benchmark overnight interest rate by 25 basis points to the 4.00 per cent-4.25 per cent range.

Fed Chair Jerome Powell said this week that “near-term risks to inflation are tilted to the upside and risks to employment to the downside – a challenging situation.”