- A new report found core inflation held steady in August while headline inflation moved up slightly.
- U.S. consumer spending remains robust in spite of price increases.
- The Fed is likely to welcome new data following last week's interest rate cut.
In spite of still-rising prices on most goods and services, a Friday report from the Commerce Department finds the pace of consumer spending jumped more than expected in August and is a factor helping buoy a U.S. economy that’s facing elevated inflation alongside a rickety jobs market.
The Bureau of Economic Analysis reports the personal consumption expenditures price index moved up 0.3% on a monthly basis from July to August with annual inflation coming in at 2.7% last month, up one-tenth of a percent from July’s 12-month reading.
Core PCE, which strips out volatile food and energy prices, rose 0.2% month-over-month but the annual reading of 2.9% for August matches July’s mark.
In spite of a steady annual core inflation reading, the costs of basic necessities all moved up in August with food prices up 0.5%, housing costs up 0.4% and energy goods and services increasing by 0.8%.
Income and spending moved up
U.S. workers saw their incomes grow by 0.4% in August but their spending rate increased even more, moving up an unexpected 0.6% or just over $129 billion.
“Net, net, consumers literally hit it out of the park with very strong gains in spending not just for August, but June and July as well,” Chris Rupkey, chief economist at Fwdbonds, told CNBC. “Summer was the time for consumer revenge spending after hunkering down in retreat from the shops and malls during the uncertainty and fear produced by the White House tariff rollout in April and May.”
Friday’s report follows closely behind a Commerce Department revision that found the U.S. economy was running much hotter in the second quarter of the year than previously reported.
The BEA’s initial estimate of U.S. gross domestic product issued weeks ago came in at 3.0%. But Thursday’s revision, representing the second update to the initial GDP data, found the actual growth rate was 3.8% in April through June of this year.
Thursday’s revisions report also included a significant adjustment to the BEA’s personal consumption expenditure index, a measure of U.S. consumer spending. Growth in that spending rate jumped from the 1.4% preliminary estimate to 2.5% in the latest update. Consumer spending is the primary driver of the U.S. economy, accounting for more than two-thirds of overall GDP.
Good news for the Fed
Friday’s PCE data will likely be well-received by the U.S. Federal Reserve following the monetary body’s decision last week to reduce its benchmark interest rate in the face of a weakening employment outlook.
At that meeting, the Federal Open Market Committee voted 11-1 to cut its benchmark federal funds rate by .25%, the first interest rate adjustment since last December and one aimed at bolstering a slowing jobs sector.
But Fed Chairman Jerome Powell underscored that the cut could also have negative impacts on inflation, which has hovered well above the Fed’s target annual rate of 2%.
“There are no risk-free paths now,” Powell said at the Sept. 17 press conference. “We have to keep our eye on inflation and at the same time we cannot ignore and must keep our eye on maximum employment. There’s a range of views on what to do but nonetheless we came together today at the meeting and acted with a high degree of unity.”