US consumer spending edges up

FE Team | Published: August 26, 2022 22:47:43

WASHINGTON, Aug 26 (Reuters): US consumer spending barely rose in July as a drop in gasoline prices weighed on receipts at service stations, but monthly inflation slowed down considerably, which could give the Federal Reserve room to scale back its aggressive interest rate hikes.
Though the report from the Commerce Department on Friday showed a modest gain in personal income last month, wages increased strongly, which could help to underpin consumer spending and keep the economy growing, though moderately.
The slowdown in inflation is likely to be welcomed by Fed officials. Fed Chair Jerome Powell was due on Friday to address the annual Jackson Hole global central banking conference in Wyoming and could shed more light on how much further US borrowing costs need to rise. The Fed has hiked its policy rate by 225 basis points since March.
Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1 per cent last month. Data for June was revised slightly down to show outlays advancing 1.0 per cent instead of 1.1 per cent as previously reported. Economists polled by Reuters had forecast consumer spending would gain 0.4 per cent.
The national average gasoline price dropped to about $4.27 per gallon in the last week of July after hitting an all-time high just above $5 in mid-June, according to data from motorist advocacy group AAA. While that freed money for spending elsewhere, it hurt sales at service stations.
As a result, spending on goods fell 0.2 per cent after surging 1.5 per cent. That partially offset a 0.3 per cent rise in spending on services.
A moderate pace of consumer spending in the second quarter helped to blunt the drag on the economy from a sharp slowdown in inventory accumulation caused by supply chain bottlenecks. Gross domestic product contracted at a 0.6 per cent annualized rate last quarter after shrinking at a 1.6 per cent pace in the first quarter.
The economy is, however, not in a recession. When measured from the income side, the economy grew at a 1.4 per cent pace, slowing from the January-March quarter's 1.8 per cent rate, the government reported on Thursday.
Though the Fed's aggressive monetary policy tightening has raised the risk of an economic downturn, there is cautious optimism that it could slow the pace of its rate hikes if inflation continues to moderate.
The personal consumption expenditures (PCE) price index dipped 0.1 per cent last month, the weakest reading since April 2020, after surging 1.0 per cent in June. In the 12 months through July, the PCE price index increased 6.3 per cent. That was the slowest year-on-year rise since January and followed a 6.8 per cent jump in June.
Excluding the volatile food and energy components, the PCE price index gained 0.1 per cent, the smallest rise since February 2021, after racing 0.6 per cent in June. The so-called core PCE price index increased 4.6 per cent on a year-on-year basis in July. The smallest annual advance in nine months followed a 4.8 per cent rise in June.
Fed officials are closely watching the PCE price indexes, in addition to the consumer price index. Though oil prices have dropped significantly, rental costs have remained hot, leaving some economists hesitant to declare that inflation has peaked.
With monthly inflation subsiding, inflation adjusted consumer spending increased 0.2 per cent in July after being unchanged in June. That bodes well for GDP growth prospects this quarter. Personal income rose 0.2 per cent, but wages shot up 0.8 per cent after increasing 0.6 per cent in June.
Strong wage growth amid a tight labor market bodes well consumer spending, especially if inflation continues to cool.