by Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer spending rose more than expected in August, but the Federal Reserve’s aggressive rate hikes are slowing as it battles stubbornly high inflation demand, which could cap an expected rebound in economic growth in the third quarter.
The Commerce Department report on Friday also showed underlying inflationary pressures were building last month. The U.S. central bank raised its policy rate by 75 basis points last week, the third straight hike by that amount, and signaled a bigger hike this year.
“The latest data suggest household spending is losing steam,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. “Risks to consumption and growth remain as interest rates rise further.” Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after falling 0.2% in July. Economists polled by Reuters had forecast consumer spending to rise 0.2%.
Part of the increase in spending reflects higher prices for household utilities.
Consumption was driven by services as lower gasoline prices free up cash for travel and dining out. Spending on services rose 0.8% after edging up 0.1% in July.
Spending on goods fell 0.5% as lower gasoline prices led to lower revenues at gas stations. Spending on goods fell 0.7% in July.
In addition to the drag on gasoline prices, spending on goods is also slowing as spending shifts toward services.
Gasoline prices fell 11.8% to $3. 691 According to the U.S. Energy Information Administration, from 7 gallon through August. Still, monthly inflation picked up in August.
The Personal Consumption Expenditure (PCE) price index rose 0.3% last month after falling 0.1% in July. For the month 12 ended in August, the PCE price index rose 6.2% after rising 6.4% in July.
Excluding the volatile food and energy components, the PCE price index rose 0.6% after being flat in July. The so-called core PCE price index rose 4.9% year-on-year in August after rising 4.7% in July.
The Fed tracks the PCE price index to achieve its 2% inflation target. Other inflation measures are running at a much higher rate. The consumer price index rose 8.3% year-on-year in August.
US stocks opened slightly higher. The dollar rose against a basket of currencies. U.S. Treasury yields fell.
Wage growth slows
Since March, the Fed has raised its policy rate from near zero to its current 3 range. 00% to 3.00%. The central bank last week raised its median forecast for core PCE inflation this year to 4.5% from 4.3% in June. Its core inflation estimate 2023 was raised to 3.1% from the 2.7% forecast previously forecast in June.
High inflation is cutting spending. Inflation-adjusted consumer spending edged up 0.1% in August after falling 0.1% in the previous month. That suggests consumer spending is likely to be tepid in the current quarter after helping to ease the drag on gross domestic product (GDP) from a slowdown in the pace of inventory buildup in the second quarter.
The economy contracted at an annual rate of 0.6%, following the previous quarter’s growth rate after contracting at a 1.6% pace in the January-March quarter. Growth in the third quarter is expected to be as high as 2.1%, mainly due to a narrowing of the trade deficit. The build-up of inventories, some of which are unsold goods due to slowing demand, is also expected to support GDP growth this quarter.
Consumer spending is likely to remain modest and wage growth shows signs of slowing. Personal income rose 0.3% in August, unchanged from the previous month’s gain.
Wages rose 0.3% after surging 0.8% in July. The savings rate remained at 3.5%.
