U.S. Consumer Spending Holds Steady; Inflation Cools to 3.5-Year Low

U.S. consumer spending remained resilient in August, rising slightly less than expected but still indicating continued economic growth in the third quarter. Meanwhile, inflation continued to cool, reaching its lowest annual rate in over three and a half years, offering encouraging signs of progress in the Federal Reserve’s fight against rising prices.

Consumer spending, a critical driver of the U.S. economy, increased by a modest 0.2% in August, following a 0.5% gain in July. This slight slowdown fell short of economists’ forecasts of a 0.3% rise. However, a separate report revealed a significant narrowing of the goods trade deficit in August, suggesting that trade would likely have a minimal impact on GDP growth this quarter.

The data, released by the Commerce Department on Friday, painted a picture of a resilient economy, with solid consumer spending supported by robust wage gains and a healthy savings rate.

“Consumer spending remains healthy, and the underlying fundamentals of the economy are strong,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics. “This resilience should support continued economic growth and a gradual re-acceleration in hiring.”

While the recent rise in the unemployment rate above 4% had sparked concerns about a potential slowdown in consumer spending, the data suggests that consumers are maintaining their spending habits, supported by a higher-than-previously-reported savings rate.

The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose by a mere 0.1% in August, matching economists’ expectations. In the 12 months through August, the PCE price index increased by 2.2%, the smallest annual gain since February 2021, following a 2.5% rise in July.

Core inflation, which excludes volatile food and energy prices, also rose by 0.1% in August, with the annual rate ticking up to 2.7% from 2.6% in July.

The continued decline in inflation is likely to influence the Federal Reserve’s upcoming interest rate decisions. While financial markets had been hoping for another substantial rate cut in November, the data suggests that the Fed may opt for a more cautious approach, particularly with the labor market showing signs of improvement.

Key Takeaways:

• U.S. consumer spending remained resilient in August, supporting continued economic growth.
• Inflation continued to abate, with the PCE price index registering its smallest annual gain in over three years.
• Robust wage gains and a healthy savings rate are underpinning consumer spending.
• The data suggests that the Fed may adopt a more cautious approach to interest rate cuts in the coming months.

The latest economic data paints a picture of a U.S. economy that continues to defy recession fears. While challenges remain, including a tight labor market and lingering inflation concerns, solid consumer spending and cooling inflation provide encouraging signs of a potential soft landing.