WASHINGTON — U.S. consumer spending barely rose in July as falling gasoline prices hurt gas station sales, but monthly inflation slowed sharply, which could reduce the need for the Federal Reserve to propose another interest rate hike of three-quarters of a percentage point next month.
Although the Commerce Department report released on Friday showed a modest increase in personal income last month, wages rose sharply. This could help support consumer spending and maintain economic growth, albeit moderately.
The slowdown in inflation should be welcomed by US central bank officials. Fed Chairman Jerome Powell told the annual conference of world central banks in Jackson Hole, Wyoming, on Friday that the United States will need tight monetary policy “for some time.” Powell gave no indication of how interest rates might rise before the Fed is done. The central bank has raised its key rate by 225 basis points since March.
“With gasoline prices on track for an even bigger drop than in July and growing signs of a slowdown in core goods inflation, we suspect this could pave the way for a higher small rise of 50 basis points in September,” said Michael Pearce, a senior US economist at Capital Economics in New York.
Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1% last month after rising 1.0% in June. Economists polled by Reuters had forecast consumer spending to gain 0.4%.
The national average gasoline price fell to around $4.27 a gallon in the last week of July after hitting a record high just above $5 in mid-June, the group’s data showed. AAA motorist defence.
While this freed up money for spending on motor vehicles, clothing, hobby items, furniture, and housing and utilities, it dented sales at gas stations. As a result, spending on goods fell 0.2% after jumping 1.5% in June.
Spending on services rose 0.3% amid moderate increases in spending on restaurants and bars and recreation services. Spending on services rose 0.7% in June.
A moderate pace of consumer spending in the second quarter helped mitigate the slowdown in the economy due to a marked slowdown in inventory accumulation caused by supply bottlenecks. Gross domestic product contracted at an annualized rate of 0.6% in the last quarter after shrinking at a pace of 1.6% in the first quarter.
Wall Street stocks fell on Powell’s comments. The dollar slipped against a basket of currencies. The yield on the two-year US Treasury note briefly hit its highest level since October 2007 before stabilizing near two-month highs.
STILL GROWING ECONOMY
The economy is not in recession, however. Measured on the revenue side, it grew at a 1.4% pace, slowing from the 1.8% rate in the January-March quarter, the government reported Thursday.
Although the Fed’s aggressive monetary policy tightening has increased the risk of an economic slowdown, the easing of price pressures, if prolonged, could give it room to scale back its rate hikes.
Financial markets are seeing a 50/50 probability of 75 basis points or a half percentage point increase at the September 20-21 meeting.
The personal consumption expenditure (PCE) price index fell 0.1% last month, the first drop since April 2020, after jumping 1.0% in June. In the 12 months to July, the PCE price index rose 6.3%. It was the smallest year-on-year rise since January and followed a 6.8% jump in June.
Excluding the volatile food and energy components, the PCE price index gained 0.1%, the weakest reading since February 2021, after a run of 0.6% in June.
The so-called core PCE price index rose 4.6% on an annual basis in July. The weakest annual increase in nine months followed a 4.8% increase in June.
There was more encouraging news on inflation. The University of Michigan consumer sentiment survey conducted on Friday showed that households’ short-term inflation expectations fell to an eight-month low in August.
Fed officials are closely watching inflation expectations, PCE price indexes, in addition to the consumer price index.
Although oil prices have fallen significantly, rental costs have remained high, leaving some economists hesitant to say inflation has peaked.
“Previous examples of inflation slowing over the past year have unexpectedly returned to acceleration,” said Will Compernolle, senior economist at FHN Financial in New York.
With monthly inflation declining, inflation-adjusted consumer spending rose 0.2% in July after remaining unchanged in June, indicating a strong pace of growth at the start of the third quarter.
Personal income rose 0.2%, but wages rose 0.8% after rising 0.6% in June. Personal income was limited by a decline in non-wage income.
Strong wage growth in a tight labor market bodes well for consumer spending, especially if inflation continues to ease. The savings rate remained unchanged at 5%.
Despite the timid rise in consumer spending, GDP growth is expected to rebound this quarter, thanks to a shrinking trade deficit. A separate Commerce Department report released on Friday showed the merchandise trade deficit narrowed 9.7% to $89.1 billion in July as imports fell. Wholesale inventories rose 0.8%, while retail inventories rose 1.1%.
“The basic outlook is that the US economy remains recession-free,” said Matt Colyar, economist at Moody’s Analytics in West Chester, Pennsylvania.
(Reporting by Lucia Mutikani; Editing by Paul Simao, Nick Zieminski and Chizu Nomiyama)