US consumer spending rebounds in August; inflation picks up

US consumer spending rebounded in August, but aggressive interest rate hikes from the Federal Reserve as it battles stubbornly high inflation are slowing demand, which could limit an anticipated rebound in economic activity this quarter.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.4 per cent last month after falling 0.2 per cent in July, the Commerce Department said on Friday (Sep 30). Economists polled by Reuters had forecast consumer spending rising 0.2 per cent.

Households got a reprieve from a drop in petrol prices, freeing up cash to spend on goods, travel and dining out.

Gasoline prices dropped 11.8 per cent to US$3.691 per gallon in August from July, according to data from the US Energy Information Administration. Still, inflation picked up last month.

The personal consumption expenditures (PCE) price index rose 0.3 per cent last month after dipping 0.1 per cent in July. In the 12 months through August, the PCE price index increased 6.2 per cent after advancing 6.4 per cent in July.

Excluding the volatile food and energy components, the PCE price index jumped 0.6 per cent after being unchanged in July. The so-called core PCE price index climbed 4.9 per cent on a year-on-year basis in August after increasing 4.7 per cent in July.

The Fed tracks the PCE price indexes for its 2 per cent inflation target. Other inflation measures are running much higher. The consumer price index increased 8.3 per cent year-on-year in August.

The US central bank last week raised its policy interest rate by 75 basis points, its third straight increase of that size, and signalled more large increases to come this year. Since March, the Fed has hiked its policy rate from near zero to the current range of 3.00 per cent to 3.25 per cent.

The Fed raised its median forecast for core PCE inflation to 4.5 per cent this year from its previous estimate of 4.3 per cent in June. Its estimate for core inflation in 2023 was boosted to 3.1 per cent from the previously projected 2.7 per cent in June.

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Inflation adjusted consumer spending barely rose in August. That suggests consumer spending could be tepid this quarter after helping to blunt the drag on gross domestic product from a slow down in the pace of inventory accumulation in the second quarter.

The economy contracted at a 0.6 per cent annualised rate last quarter, after shrinking at a 1.6 per cent pace in the January-March quarter. Growth estimates for the third quarter are as high as a 2.1 per cent rate, driven largely by a narrowing deficit. An accumulation of inventory, part of it unsold goods because of slowing demand, is also seen support GDP growth this quarter. REUTERS