US consumer spending misses expectation in July; inflation slows

US consumer spending barely rose in July, but inflation eased considerably, which could give the Federal Reserve room to scale back its aggressive interest rate increases.

Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1 per cent last month, the Commerce Department said on Friday (Aug 26). 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 petrol price dropped to about US$4.27 per gallon in the last week of July after hitting an all-time high just above US$5 in mid-June, according to data from motorist advocacy group AAA. That likely freed money for spending elsewhere.

Prices of apparel and services like air travel, hotel and motel accommodation also declined in July, curbing inflation.

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 annualised 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.

Risks of a downturn remain as the Federal Reserve aggressively tightens monetary policy to control inflation. There is, however, cautious optimism that the US central bank 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 after surging 1.0 per cent in June. In the 12 months through July, the PCE price index increased 6.3 per cent. The PCE price index shot up 6.8 per cent on a year-on-year basis in June.

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Excluding the volatile food and energy components, the PCE price index gained 0.1 per cent 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 after rising 4.8 per cent 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. REUTERS