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US consumer spending up solidly in June; inflation moderate

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US consumers spending increased solidly in June as households spent more on restaurants and accommodation, building a strong base for the economy heading into the third quarter, while inflation rose moderately.

Washington

US CONSUMER spending increased solidly in June as households spent more on restaurants and accommodation, building a strong base for the economy heading into the third quarter, while inflation rose moderately.

The Commerce Department said on Tuesday that consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4 per cent in June. Data for May was revised up to show consumer spending advancing 0.5 per cent instead of the previously reported 0.2 per cent increase.

June's increase in consumer spending was in line with economists' expectations. The data was included in last Friday's second-quarter gross domestic product report, which showed consumer spending accelerating at a 4.0 per cent annualised rate during that period after a pedestrian 0.5 per cent pace in the first quarter.

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The economy grew at a 4.1 per cent rate in the second quarter, almost double the January-March period's 2.2 per cent pace and the strongest performance in nearly four years. June's increase in consumer spending sets it on a higher growth path heading into the third quarter.

Consumer spending during the month was boosted by spending at restaurants and on accommodation. Spending on goods was unchanged after surging 0.9 per cent in May.

Spending on services accelerated 0.6 per cent after rising 0.3 per cent in the prior month.

Prices continued to steadily rise. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components gained 0.1 per cent. It had risen by 0.2 per cent in May.

That kept the year-on-year increase in the so-called core PCE price index at 1.9 per cent for a third straight month. The core PCE index is the Federal Reserve's preferred inflation measure. The core PCE hit the US central bank's 2 per cent inflation target in March for the first time since December 2011.

Fed officials were due to start a two-day meeting later on Tuesday. They are expected to leave interest rates unchanged after increasing borrowing costs in June for the second time this year. The Fed has forecast two more rate hikes by December.

The moderate inflation helped to support consumer spending in June. When adjusted for inflation, consumer spending rose 0.3 per cent in June after a similar gain in May.

In June, personal income rose 0.4 per cent, matching May's increase. Wages gained 0.4 per cent. The saving rate was unchanged at 6.8 per cent in June.

Adding to the good economic news, in a separate report on Tuesday, the Labor Department said US labour costs increased in the second quarter as employers boosted benefits for workers, leading to the largest annual increase since 2008.

The Employment Cost Index, the broadest measure of labour costs, rose 0.6 per cent after an unrevised 0.8 per cent advance in the first quarter, the Labor Department said on Tuesday.

Labour costs increased 2.8 per cent year on year, the biggest annual gain since September 2008 and followed a 2.7 per cent advance in the first quarter.

Economists polled by Reuters had forecast the ECI rising 0.7 per cent in the April-June quarter.

Wages and salaries, which account for 70 per cent of employment costs, rose 0.5 per cent in the second quarter. They increased 0.9 per cent in the first three months of the year.

Wages and salaries were up 2.8 per cent in the 12 months through June, also the biggest annual gain since September 2008. Economists expect a significant acceleration in wage growth in the second half of the year, boosted by a tightening labour market. The labour market is considered to be near or at full employment, with a 4 per cent jobless rate.

The ECI is widely viewed by policymakers and economists as one of the better measures of labour market slack. It is also considered a better predictor of core inflation. Economists say labour costs need to rise by at least 3 per cent to lift inflation to the US central bank's 2 per cent inflation target.

Private sector wages and salaries rose 0.6 per cent in the second quarter. They were up 2.9 per cent in the 12 months through June after a similar gain in the year to March.

Benefits for all workers increased 0.9 per cent in the April-June quarter, the biggest gain in four years, after rising 0.7 per cent in the first quarter. They were up 2.9 per cent in the 12 months through June, the largest increase December 2011, after rising 2.6 per cent in the year to March. REUTERS