US consumer spending jumps as inflation comes in softer

WASHINGTON, D.C.: U.S. consumer spending surged in August while inflation rose less than economists expected, a combination that could give the Federal Reserve more time before raising interest rates again. The Personal Consumption Expenditures Price Index increased 0.3 percent in August after a downwardly revised 0.1 percent rise in July, the Commerce Department's Bureau of Economic Analysis said on September 30. Economists polled by Reuters had expected a 0.4 percent increase. In the 12 months through August, PCE inflation rose 3.4 percent, following a downward revision to 3.4 percent in July. July's annual inflation rate had previously been reported at 3.7 percent. The BEA changed its methodology for calculating prices for software and accessories, portfolio management fees, and legal services in the PCE price index. It also revised inflation data going back to 2021. Excluding volatile food and energy components, the PCE price index increased 0.2 percent in August following a downwardly revised 0.1 percent rise in July. Core PCE inflation advanced 3.0 percent from a year earlier, the same as July's downwardly revised increase. The July figure had previously been estimated at 3.3 percent. The Fed tracks the PCE measures for its 2 percent inflation target. "The less-than-feared price data for August may buy the Fed time to await more data and pass on October 28, but still-elevated inflation and a resilient consumer and economy point to another rate hike by year-end," said Sal Guatieri, a senior economist at BMO Capital Markets. The Fed raised its benchmark overnight interest rate this month to a range of 3.75 percent to 4.00 percent, its first increase in three years, and indicated further increases could follow. Financial markets put the probability of an October rate increase at roughly 34.9 percent after the inflation data, according to CME's FedWatch Tool, down from 51.5 percent before the figures were released and 70 percent on September 28. U.S. stocks rose, Treasury yields fell, and the dollar weakened against a basket of currencies. Meanwhile, consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.9 percent in August after a downwardly revised 0.1 percent increase in July. Adjusted for inflation, spending rose 0.6 percent. Spending increased at a 3.8 percent annualized rate in the April-June quarter, helping the economy grow at a 2.2 percent pace. Business investment related to the buildout of AI infrastructure also supported gross domestic product, with equipment spending posting another quarter of double-digit growth. Personal income increased 0.2 percent in August, while disposable household income rose 0.3 percent but was unchanged after adjusting for inflation. The saving rate declined to 4.1 percent from 4.6 percent in July, although annual revisions showed households had more savings than previously estimated.