By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer spending edged up in July as falling gasoline prices hurt sales at gas stations, but monthly inflation slowed sharply, which could reduce the need for the Federal Reserve to offer three more quarter of a percentage point rate hike next month.
Although the Commerce Department’s report on Friday showed modest growth in personal income last month, wages rose sharply. This could help support consumer spending and keep the economy growing, albeit modestly.
The slowdown in inflation is likely to be welcomed by US Central Bank officials. Fed Chairman Jerome Powell told the annual world conference of central banks in Jackson Hole, Wyoming on Friday that the US will need tight monetary policy “for some time.” Powell gave no indication of how high interest rates could rise before the Fed ends. The central bank has raised its key interest rate by 225 basis points since March.
“With gasoline prices on track to fall even more than in July and increasing signs that core inflation is easing, we suspect that the way could be paved for a smaller 50 basis point increase in September.” , said Michael Pearce, senior employee. American economist at Capital Economics in New York.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.1 percent last month, after rising 1.0 percent in June. Economists polled by Reuters had forecast consumer spending would gain 0.4 percent.
The national average price of gasoline fell to about $4.27 a gallon in the last week of July, after hitting an all-time high of just over $5 in mid-June, according to data from the motorist advocacy group AAA.
While this freed up money for spending on motor vehicles, clothing, leisure items, furniture, as well as housing and utilities, it reduced gas station sales. As a result, spending on goods fell 0.2% after rising 1.5% in June.
Spending on services rose 0.3% amid modest increases in spending at restaurants and bars, as well as leisure services. Spending on services rose 0.7% in June.
The modest pace of consumer spending in the second quarter helped cushion the economy’s setback from a sharp slowdown in inventory build-up caused by supply bottlenecks. Gross Domestic Product contracted at an annual rate of 0.6% last quarter after contracting at a rate 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 U.S. Treasury note briefly rose to its highest level since October 2007 before settling near two-month highs.
THE ECONOMY IS STILL GROWING
However, the economy is not in recession. When measured on the income side, it grew at a 1.4 percent pace, slowing from 1.8 percent in the January-March quarter, the government said on Thursday.
Although the Fed’s aggressive monetary policy tightening has raised the risk of an economic recession, the easing of price pressures, if sustained, could give it room to limit its rate hikes.
Financial markets see a 50/50 chance of a rise of 75 basis points, or half a percentage point, in the September 20-21 session.
The personal consumption expenditures (PCE) price index fell 0.1% last month, the first decline since April 2020, after rising 1.0% in June. In the 12 months to July, the PCE price index rose 6.3%. This was the slowest year-on-year rise since January and followed a 6.8% rise in June.
Excluding volatile food and energy components, the PCE price index gained 0.1%, the weakest reading since February 2021, after a 0.6% run in June.
The so-called core PCE price index rose 4.6% year-on-year in July. The smallest annual advance in nine months followed a 4.8% rise in June.
There was more encouraging news on inflation. The University of Michigan consumer sentiment survey on Friday showed households’ short-term inflation expectations fell to an eight-month low in August.
Fed officials closely monitor inflation expectations, the PCE price indices, in addition to the consumer price index.
Although oil prices have fallen significantly, rental costs remain high, leaving some economists hesitant to say that inflation has peaked.
“Previous instances of slowing inflation momentum over the past year have unexpectedly swung back into acceleration,” said Will Compernolle, senior economist at FHN Financial in New York.
With monthly inflation easing, inflation-adjusted consumer spending rose 0.2% in July after being flat in June, suggesting a steady 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 the decline in non-wage income.
Strong wage growth amid a tight labor market bodes well for consumer spending, especially if inflation continues to ease. The savings rate remained unchanged at 5%.
Despite tepid growth in consumer spending, GDP growth is expected to pick up this quarter, thanks to a narrowing trade deficit. A separate report from the Commerce Department on Friday showed the goods trade deficit narrowed 9.7 percent to $89.1 billion in July as imports fell. Wholesale inventories rose 0.8%, while retail inventories rose 1.1%.
“The basic outlook is for the US economy to remain recession-free,” said Matt Colyar, an economist at Moody’s Analytics in West Chester, Pennsylvania.
(Reporting by Lucia Mutikani; Editing by Paul Simao, Nick Zieminski and Chizu Nomiyama)