U.S. consumer spending rose a solid 0.4 per cent in July, the sixth straight month of healthy gains. At the same time, a key gauge of inflation posted its sharpest annual gain in six years, likely keeping the Federal Reserve on track to keep raising interest rates gradually.
The July spending gain, fueled by strong job growth and tax cuts, followed a similar 0.4 per cent rise in June, the government said Thursday. Inflation, as measured by a barometer closely watched by the Fed, rose 2.3 per cent for the 12 months that ended in July, the fastest year-over-year increase since 2012.
Though the inflation figure exceeded the Fed’s 2 per cent target, its officials have said they’re willing to tolerate slightly higher inflation temporarily in light of a six-year period when it fell short of the Fed’s 2 per cent goal. They are widely expected to keep gradually raising their benchmark rate, thereby leading to slightly higher rates on many consumer and business loans.
Personal income, which provides the fuel for future spending increases, advanced by a moderate 0.3 per cent in July after a 0.4 per cent June increase. Modestly higher wages and salaries reflect an unemployment rate that has reached its lowest level in nearly 18 years.
The overall economy, as measured by the gross domestic product, grew at a 4.2 per cent annual rate in the April-June quarter, which also reflected a solid rebound in consumer spending, after a lacklustre performance in the first quarter. Economists are forecasting that GDP growth will slow slightly to a still solid 3 per cent rate in the current quarter, supported by continued gains in consumer spending.
The inflation rise in July, after a 2.2 per cent rise in June, was driven by rising energy prices. A core inflation gauge that excludes energy and food was up 2 per cent for the 12 months ending in July, up from a 1.9 per cent year-over-year increase in June.
The Fed has raised its key rate twice this year and is projecting a total of four rate hikes for the full year, with the next one expected next month. President Donald Trump has recently let it be known that he is unhappy with the continued rate hikes. Trump has complained that the rate increases, intended to prevent inflation from rising too fast, are making it harder for the administration to achieve its goal of accelerating growth.
Central bank officials have said they plan to continue raising rates at a gradual pace despite the Trump criticism.