U.S. consumer spending rebounds, but high inflation eroding demand

© Reuters. People shop at the Eastern Market in Washington, U.S., February 11, 2022. REUTERS/Brendan McDermid

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. consumer spending increased more than expected in August, but aggressive interest rate hikes from the Federal Reserve as it battles stubbornly high inflation are slowing demand, which could limit an anticipated rebound in economic growth in the third quarter.

The report from the Commerce Department on Friday also showed underlying inflation pressures building up last month. The U.S. central bank last week raised its policy interest rate by 75 basis points, its third straight increase of that size, and signaled more large increases to come this year.

"The latest data are pointing to a loss of momentum in household spending," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. "With further rate hikes in the pipeline, risks to both consumption and growth remain to the downside."Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4% last month after falling 0.2% in July. Economists polled by Reuters had forecast consumer spending rising 0.2%.

Some of the increase in spending reflected higher prices for household utilities.

Spending was driven by services as a drop in gasoline prices freed up cash to spend on travel and dining out. Outlays on services increased 0.8% after edging up 0.1% in July.

Spending on goods fell 0.5%, held down by a drop in receipts at gasoline service stations amid lower gasoline prices. Goods spending fell 0.7% in July.

In addition to the gasoline price drag, outlays on goods are slowing as spending rotates back to services.

Gasoline prices dropped 11.8% to $3.691 per gallon in August from July, according to data from the U.S. Energy Information Administration. Still, monthly inflation picked up in August.

The personal consumption expenditures (PCE) price index rose 0.3% last month after dipping 0.1% in July. In the 12 months through August, the PCE price index increased 6.2% after advancing 6.4% in July.

Excluding the volatile food and energy components, the PCE price index jumped 0.6% after being unchanged in July. The so-called core PCE price index climbed 4.9% on a year-on-year basis in August after increasing 4.7% in July.

The Fed tracks the PCE price indexes for its 2% inflation target. Other inflation measures are running much higher. The consumer price index increased 8.3% year-on-year in August.

U.S. stocks were set to open slightly higher. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

WAGE GROWTH SLOWING

Since March, the Fed has hiked its policy rate from near zero to the current range of 3.00% to 3.25%. The central bank last week raised its median forecast for core PCE inflation to 4.5% this year from its previous estimate of 4.3% in June. Its estimate for core inflation in 2023 was boosted to 3.1% from the previously projected 2.7% in June.

High inflation is cutting into spending. Inflation-adjusted consumer spending edged up 0.1% in August after dipping 0.1% in the prior month. That suggests consumer spending could be tepid this quarter after helping to blunt the drag on gross domestic product from a slowdown in the pace of inventory accumulation in the second quarter.

The economy contracted at a 0.6% annualized rate last quarter after shrinking at a 1.6% pace in the January-March quarter. Growth estimates for the third quarter are as high as a 2.1% rate, driven largely by a narrowing trade deficit. An accumulation of inventory, part of it unsold goods because of slowing demand, is also seen supporting GDP growth this quarter.

Consumer spending is likely to remain moderate, with wage growth showing signs of slowing. Personal income rose 0.3% in August, matching the prior month's gain.

Wages increased 0.3% after surging 0.8% in July. The saving rate was unchanged at 3.5%.