Rise in Consumer Spending and Acceleration of Inflation

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By Harriet Torry

Consumer spending saw a notable increase in July, while inflation also picked up pace, creating potential complications for the Federal Reserve’s upcoming decision on whether to keep interest rates steady in September.

According to the Commerce Department, consumer spending, a key driver of economic growth, rose by 0.8% in July, marking a higher growth rate compared to the revised 0.6% increase seen in June. Americans spent more on essential items like groceries, as well as recreational goods, vehicles, and various services such as housing, dining out, financial services, and insurance. When adjusted for inflation, consumer spending still showed promising growth, rising by 0.6% in July.

The Federal Reserve’s preferred measure of consumer prices, the personal-consumption expenditures price index, registered a 3.3% increase in July compared to the same period last year. This marks a rise from the 3% gain observed in June. Core prices, which exclude volatile food and energy categories, increased by 4.2% in July year-over-year, showing a slight advancement from the 4.1% increase recorded in June. Many economists consider core inflation to be a better indicator of future inflation trends compared to overall inflation rates.

On a month-to-month basis, both overall and core prices in July experienced a 0.2% increase, matching the pace seen in June.

These latest figures indicate that Americans, driven by rising wages, are maintaining their spending habits in spite of the Federal Reserve’s efforts to curb inflation through economic slowdown. This aligns with the recent robust retail sales report that heightens concerns about accelerated growth and higher interest rates.

“The consumer remains strong due to a robust labor market,” commented Stephen Gallagher, U.S. chief economist at Société Générale.

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