WASHINGTON (Reuters) -U.S. consumer spending increased slightly more than expected in August, keeping the economy on solid ground as the third quarter progressed, while inflation continued to rise at a measured pace.
Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.6% last month after an unrevised 0.5% advance in July, the Commerce Department’s Bureau of Economic Analysis said on Friday.
Economists polled by Reuters had forecast consumer spending increasing 0.5% after a previously reported 0.5% gain in July.
Spending has marched ahead despite a significant labor market slowdown, marked by stall-speed job growth in the last three months. It is being driven by high-income households as a robust stock market and still-elevated home prices boost their wealth. Federal Reserve data this month showed household wealth jumped to a record $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.
“With spending concentrated among high-income households the risk to the consumption growth forecast is more concentrated in the drivers of household wealth – the stock market and house prices,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “Wealth effects have become more potent for consumer spending, a positive when stock and house prices are rising, but a risk if, and when, they sputter.”
ECONOMISTS EXPECT SPENDING WILL SLOW
Strong consumer spending contributed to gross domestic product growing at a 3.8% annualized rate in the second quarter, the fastest in nearly two years. Growth estimates for the third quarter are converging around a 2.5% pace.
Economists expect spending to slow considerably by the end of the year, undercut by higher prices. Inflation has been slow to rise in response to President Donald Trump’s sweeping tariffs as businesses sold inventory accumulated before the duties kicked in and even absorbed some of the duties.
The Personal Consumption Expenditures (PCE) Price Index increased 0.3% in August after gaining 0.2% in July, the BEA said. In the 12 months through August, the PCE Price Index advanced 2.7% after climbing 2.6% in July.
Excluding the volatile food and energy components, the PCE Price Index rose 0.2% last month after increasing 0.2% in July. In the 12 months through August, the so-called core inflation increased 2.9% after rising 2.9% in July.
The Fed tracks the PCE price measures for its 2% 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%-4.25% 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.”
(Reporting by Lucia Mutikan; Editing by Chizu Nomiyama)
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