US consumer spending recovers, but high inflation erodes demand

  • Consumer spending increases 0.4% in August
  • Personal income rises 0.3%; savings rate stable at 3.5%
  • The basic PCE price index rises 0.6%; 4.9% year-on-year

WASHINGTON, Sept 30 (Reuters) – U.S. consumer spending rose more than expected in August, but aggressive interest rate hikes by the Federal Reserve as it battles stubbornly high inflation are slowing demand, which could limit an anticipated rebound in economic growth in the third quarter. .

The Commerce Department report on Friday also showed that underlying inflationary pressures built up last month. Last week, the US central bank raised its policy rate by 75 basis points, its third consecutive increase of that size, and signaled larger hikes for this year.

“The latest data points to a loss of momentum in household spending,” said Rubeela Farooqi, chief US economist at High Frequency Economics in White Plains, New York. “With further rate hikes in the pipeline, the risks to both consumption and growth remain to the downside.” Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4% last month after falling 0.2% in July. Economists polled by Reuters had forecast consumer spending rising 0.2%.

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Part of the increase in spending reflected higher prices for domestic utilities.

Spending was fueled by services, as a drop in gasoline prices freed up cash to spend on travel and dining. Spending on services increased 0.8% after rising 0.1% in July.

Spending on goods fell 0.5%, sustained by a drop in receipts at gasoline service stations amid lower gasoline prices. Spending on goods fell 0.7% in July.

In addition to the drag on gasoline prices, outlays on goods are slowing as spending returns to services.

Gasoline prices fell 11.8% to $3,691 a gallon in August from July, according to data from the US Energy Information Administration. Still, monthly inflation picked up in August.

The personal consumption expenditures (PCE) price index rose 0.3% last month after falling 0.1% in July. In the 12 months through August, the PCE price index rose 6.2% after advancing 6.4% in July.

Excluding volatile food and energy components, the PCE price index jumped 0.6% after being unchanged in July. The so-called core PCE price index rose 4.9% year-on-year in August after rising 4.7% in July.

The Fed tracks PCE price indices for its 2% inflation target. Other measures of inflation are running much higher. The consumer price index increased by 8.3% year-on-year in August.

US stocks were poised to open slightly higher. The dollar rose against a basket of currencies. US Treasury yields fell.

DECREASE IN SALARY GROWTH

Since March, the Fed has raised its policy rate from near zero to the current range of 3.00% to 3.25%. Last week, the central bank raised its average forecast for core PCE inflation to 4.5% this year from its previous estimate of 4.3% in June. His estimate for core inflation in 2023 was boosted to 3.1% from 2.7% previously projected in June.

High inflation is cutting spending. Inflation-adjusted consumer spending rose 0.1% in August after falling 0.1% in the previous month. That suggests consumer spending could be tepid this quarter after helping mitigate the drag on gross domestic product from a slowdown in the pace of inventory buildup in the second quarter.

The economy shrank at an annualized rate of 0.6% last quarter after shrinking at a 1.6% pace in the January-March quarter. Growth estimates for the third quarter reach a rate of 2.1%, largely driven by a shrinking trade deficit. An inventory buildup, part of unsold goods due to slowing demand, is also seen as supporting GDP growth this quarter.

Consumer spending is likely to remain subdued, and wage growth shows signs of slowing. Personal income rose 0.3% in August, matching the previous month’s gain.

Wages rose 0.3% after rising 0.8% in July. The savings rate was unchanged at 3.5%.

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Information from Lucía Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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