US consumer spending rises in July; inflation remains tame

US consumer spending increased for a fourth straight month in July amid strong demand for automobiles, pointing to a pickup in economic growth that could allow the Federal Reserve to raise interest rates this year.

The Commerce Department said on Monday that consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.3 per cent last month after an upwardly revised 0.5 per cent gain in June.

July’s increase was in line with economists’ expectations. Spending was previously reported to have risen 0.4 per cent in June. When adjusted for inflation, consumer spending also gained 0.3 per cent in July after advancing 0.4 per cent in June.

Consumer spending appears to have retained some of its momentum from the second quarter, when it grew at a 4.4 per cent annual rate, the fastest in nearly two years. That jump helped to mitigate some of the impact of a sharp inventory drop and prolonged business investment downturn.

The economy grew at a lackluster 1.1 per cent growth rate in the second quarter.

July’s consumer spending data added to reports on the goods trade deficit, industrial production, durable goods orders and residential construction that have pointed to an acceleration in economic growth early in the third quarter.

The Atlanta Fed is currently estimating third-quarter GDP growth rising at a 3.4 per cent annual pace.

Consumer spending is being driven by a tightening labour market, which is steadily lifting wages. Rising home values and stock market prices, which are boosting household wealth, are also supporting consumption.

Fed chair Janet Yellen told a gathering of global central bankers on Friday that she believed the case for raising interest rates had been strengthened in recent months by the "solid performance of the labor market and our outlook for economic activity and inflation."

Last month, there was little sign of inflation pressures even as consumer spending firmed.

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, edged up 0.1 per cent after a similar gain in June.

In the 12 months through July the core PCE increased 1.6 per cent. It has risen by the same margin every month since March. The core PCE is the Fed’s preferred inflation measure and is running below its 2 per cent target.

Consumer spending last month was lifted by a 1.6 per cent surge in purchases of long-lasting manufactured goods such as automobiles. Spending on services rose 0.4 per cent, but outlays on non-durable goods slipped 0.5 per cent.

Personal income increased 0.4 per cent in July after rising 0.3 per cent in June. Wages and salaries advanced 0.5 per cent. Savings rose to $794.7 billion from $776.2 billion in June.

Reuters