US Consumer Spending Picks Up in July, Inflation Slows
US consumer spending showed signs of acceleration in July, while inflation growth slowed, boosting expectations that the Federal Reserve would maintain interest rates next month. According to the Commerce Department’s latest report, consumer spending, which plays a crucial role in the US economy, rose by 0.8% last month. This figure was an increase from June’s revised rate of 0.6%, surpassing economists’ forecast of a 0.7% rise. Both goods and services contributed to the surge in spending. The combination of decelerating inflation and a tight labor market, which supports wage gains, has been instrumental in driving consumer spending and sustaining the overall economy.
Recent indicators have been encouraging for the US economy. Yesterday’s report revealed that the economy expanded by an annualized rate of 2.1% in the second quarter, with consumer spending compensating for weak areas such as trade, inventory drawdown, and the housing market. Given these positive trends, experts predict that the Federal Reserve will opt to leave its benchmark overnight interest rate unchanged at its upcoming policy meeting on September 19-20, according to the CME Group’s FedWatch Tool.
Inflation, as measured by the personal consumption expenditures (PCE) price index, increased by 0.2% in July, matching June’s upturn. Over the past 12 months, the PCE price index rose by 3.3%, compared to the 3.0% increase in June. When excluding the volatile food and energy sectors, the core PCE price index also rose by 0.2% in July, mirroring the previous month’s gain. On a year-on-year basis, the core PCE price index climbed by 4.2% in July, following a 4.1% rise in June. Furthermore, the annual PCE inflation rates were boosted by a lower base of comparison from the previous year. The Federal Reserve tracks the PCE price indexes in relation to its 2% inflation target.
The deceleration of inflation has sparked optimism that the Federal Reserve is nearing the end of its rate hikes and may achieve a soft landing for the economy. As concerns over a potential recession this year subside, many economists have revised their forecasts accordingly. Although the labor market has shown signs of cooling, with job openings hitting their lowest level in almost two and a half years in July, overall conditions remain tight. Employers are largely retaining workers after grappling with hiring difficulties during the COVID-19 pandemic.
Separately, the Labor Department reported a decrease of 4,000 initial claims for state unemployment benefits to a seasonally adjusted 228,000 for the week ended August 26. Economists had anticipated 235,000 claims. The number of individuals receiving benefits after their initial week of aid rose by 28,000 to 1.725 million during the week ending August 19. However, it is important to note that this data does not impact August’s employment report, which is scheduled for release on Friday.
According to a Reuters survey of economists, nonfarm payrolls are expected to have increased by 170,000 jobs in August, following a rise of 187,000 jobs in July. The unemployment rate is also predicted to remain unchanged at 3.5%, representing a more than 50-year low.
