- Consumer spending rises 0.1% in July
- The decline in gas stations is responsible for the small increase
- Core PCE Price Index up 0.1%; by 4.6 year-on-year
WASHINGTON, Aug 26 (Reuters) – US consumer spending barely rose in July as falling gasoline prices hurt sales at gas stations, but monthly inflation slowed sharply, which could reduce the need for the Federal Reserve to gain another three-quarters of a percentage point deliver rate hike next month.
Although Friday’s Commerce Department report showed a modest increase in personal income over the past month, wages have risen sharply. This could help support consumer spending and keep the economy growing, albeit moderately.
The slowdown in inflation is likely to be welcomed by US Federal Reserve officials. Fed Chair Jerome Powell said Friday at Jackson Hole’s annual global central bank conference in Wyoming that the US will need tight monetary policy “for some time.” Powell gave no indication of how high interest rates could go before the Fed is done. The central bank has raised interest rates by 225 basis points since March. Continue reading
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“With gasoline prices on track for an even sharper decline than July and mounting signs that core inflation is decelerating, we suspect this could pave the way for a smaller 50 basis point hike in September,” said Michael Pearce, a senior US economist at Capital Economics in New York.
Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1% last month after rising 1.0% in June. Economists polled by Reuters had forecast consumer spending to rise 0.4%.
The national average gasoline price fell to about $4.27 a gallon in the last week of July after hitting an all-time high of just over $5 in mid-June, according to data from the motoring advocacy group AAA.
While this freed up money for spending on automobiles, clothing, leisure items, furniture, and housing and utilities, it depressed sales at gas stations. As a result, goods spending fell 0.2% after rising 1.5% in June.
Services spending rose 0.3% as spending on restaurants and bars and leisure services rose modestly. Services spending increased by 0.7% in June.
A moderate pace of consumer spending in the second quarter helped ease the burden on the economy from a sharp deceleration in inventory building due to supply constraints. Gross domestic product shrank an annualized 0.6% in the most recent quarter after contracting 1.6% in the first quarter.
Wall Street stocks fell on Powell’s comments. The dollar slipped against a basket of currencies. The US two-year Treasury yield briefly rose to its highest level since October 2007 before stabilizing near two-month highs.
ECONOMY CONTINUES TO GROW
However, the economy is not in recession. From the income side, it grew 1.4%, slowing from the 1.8% rate in the January-March quarter, the government reported on Thursday. Continue reading
Although the Fed’s aggressive monetary tightening has increased the risk of an economic downturn, a sustained easing in price pressures could give it scope to scale back its rate hikes.
Financial markets see a 50/50 chance of 75 basis points, or a half percentage point rise, in the Sept. 20-21 session.
The personal consumption expenditure (PCE) price index fell 0.1% last month, the first decline since April 2020, after rising 1.0% in June. In the 12 months to July, the PCE price index rose 6.3%. That was the slowest year-on-year increase since January and followed a 6.8% jump in June.
Excluding the volatile food and energy components, the PCE price index rose 0.1%, its weakest reading since February 2021, after rising 0.6% in June.
The so-called core PCE price index rose 4.6% year-on-year in July. The smallest annual increase in nine months was followed by a 4.8% increase in June.
There was more encouraging news on inflation. The University of Michigan consumer sentiment survey on Friday showed that households’ near-term inflation expectations fell to an eight-month low in August. Continue reading
Fed officials closely monitor inflation expectations, the PCE price indexes, in addition to the CPI.
Although oil prices have fallen significantly, rental costs have remained high, making some economists reluctant to say inflation has peaked.
“Previous instances of slowing inflation momentum over the past year have unexpectedly led to an acceleration again,” said Will Compernolle, senior economist at FHN Financial in New York.
With monthly inflation easing, inflation-adjusted consumer spending rose 0.2% in July after being flat in June, suggesting a steady pace of growth at the start of the third quarter.
Personal income rose 0.2%, but wages soared 0.8% after rising 0.6% in June. Personal income has been dampened by a decline in non-wage income.
Strong wage growth amid a tight labor market bodes well for consumer spending, especially if inflation continues to cool. The savings rate remained unchanged at 5%.
Despite the muted rise in consumer spending, GDP growth should recover this quarter on the back of a narrowing trade deficit. A separate Commerce Department report on Friday showed that the goods trade deficit narrowed 9.7% to $89.1 billion in July as imports fell. Wholesale inventories increased by 0.8%, while inventories at retailers increased by 1.1%.
“The basic outlook is that the US economy remains recession-free,” said Matt Colyar, an economist at Moody’s Analytics in West Chester, Pennsylvania.
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Reporting by Lucia Mutikani; Edited by Paul Simao, Nick Zieminski and Chizu Nomiyama
Our standards: The Thomson Reuters Trust Principles.
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