Business Standard

Consumer spending rises strongly; inflation firming


By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending increased solidly in July, pointing to strong economic growth early in the third quarter, while a measure of underlying inflation hit the Federal Reserve's 2 percent target for the third time this year.
Other data on Thursday showed an increase in new applications for unemployment benefits last week, but the underlying trend continued to point to a robust labor market. Strong domestic demand, rising inflation and a tightening jobs market likely will keep the U.S. central bank on course to increase interest rates for a third time this year in September.
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4 percent last month after advancing by the same margin in June. Households spent more at restaurants and on accommodation last month.
There was also an increase in spending on prescription medication. Economists polled by Reuters had forecast consumer spending rising 0.4 percent in July.
With demand strong last month, prices continued their gradual upward trend. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2 percent after edging up 0.1 percent in June.
That lifted the year-on-year increase in the so-called core PCE price index to 2.0 percent from 1.9 percent in June. The core PCE index is the Fed's preferred inflation measure. It hit the U.S. central bank's 2 percent inflation target in March for the first time since April 2012.
Minutes of the Fed's July 31-Aug. 1 meeting published last week showed some policymakers worried "a prolonged period in which the economy operated beyond potential could give rise to inflationary pressures."
The dollar was largely unchanged against a basket of currencies after the data. U.S. stock index futures were trading lower while prices of U.S. Treasuries were higher.
Strong consumer spending helped fire up economic growth in the second quarter, with gross domestic product rising at a 4.2 percent annualized rate, the fastest in nearly four years and almost double the 2.2 percent pace notched in the January-March quarter.
Solid consumer spending should blunt some of the impact on the economy from an anticipated widening in the trade deficit and weakness in the housing market in the third quarter. Recent data showed a sharp rise in the goods trade deficit in July as well as further declines in home sales and a moderate rise in homebuilding last month.
Consumer spending, which grew at a 3.8 percent annualized rate in the April-June period following a pedestrian 0.5 percent pace in the first quarter, is being supported by the labor market, which is viewed as being near or at full employment.
In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 213,000 for the week ended Aug. 25, the Labor Department said on Thursday. Economists polled by Reuters had forecast claims rising to 214,000 in the latest week.
The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 1,500 last week to 212,250, the lowest level since December 1969.
There are no signs so far in the claims data that the Trump administration's protectionist trade policy, which has led to an escalating trade war with China and tit-for-tat import tariffs with other trading partners, including the European Union, Canada and Mexico, is hurting the labor market.
Economists have warned that the tariffs could undermine business spending, disrupt the supply chain as well as raise prices of some goods.
In July, spending on goods rose 0.2 percent after slipping 0.1 percent in June. Outlays on services increased 0.4 percent after surging 0.6 percent in the prior month.
Personal income rose 0.3 percent in July after increasing 0.4 percent in the prior month. Wages gained 0.4 percent. The saving rate slipped to 6.7 percent last month from 6.8 percent in June.
(Reporting by Lucia Mutikani; Editing by Paul Simao)

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First Published: Aug 30 2018 | 6:37 PM IST

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