Consumer spending increased slightly in August compared to July, showing that the economy is still doing well despite inflation driving up the cost of food, rent, and other necessities.
According to data released on Friday by the Department of Commerce, Americans increased their spending in stores and on services like haircuts by 0.4 percent in August after it decreased by 0.2 percent in July. However, a large portion of that growth was due to increasing prices, with an inflation rate carefully watched by the Federal Reserve rising by 0.3 percent in August, according to the government's data.
The data revealed that, despite rapidly rising interest rates, erratic stock market fluctuations, and high inflation, the economy is displaying some resilience.
However, there were indications that consumers are being affected by increased prices. Consumer expenditure is expanding more slowly after accounting for inflation. In the April through June period, it grew by 2% annually. However, according to figures from July and August, spending growth is expected to fall in the July to September quarter to just 0.5 percent annually.
After contracting in the first six months of this year, the economy is predicted to expand in the third quarter. After the spending report, however, several economists revised their projections downward and now anticipate growth to be only around 1% each year.
Along with spending less, Americans are saving less to keep up with rising costs. According to the study released on Friday, the US saving rate in August was only 3.5%, a significant decline from the pre-pandemic average of nearly 8%.Another indication of recent consumer weakness is the steep decline in sales reported by used automobile vendor Carmax for the three months ending in August. With high inflation and rising borrowing rates, the corporation blamed "affordability problems" for consumers for the fall.
increasing costs
Prices increased 6.2 percent over the previous year, down from a 6.4 percent annual gain in July but still close to June's four-decade record of 7 percent. The statistic is lower than the more well-known consumer price index, which showed an increase in prices of 8.3% in August from a year earlier and was announced earlier this month.
The two indices are different for a variety of reasons. For instance, the consumer price index gives rents and housing expenses, which have been gradually growing, significantly more weight than the Friday-released price index for personal consumption expenditures.
Core prices increased by 0.6 percent when volatile food and energy costs are excluded, which is a significant increase over July's flat reading. They jumped from July's level of 4.6 percent to 4.9 percent from a year earlier.These results exceeded expectations, which may increase the likelihood that the Federal Reserve will raise its benchmark interest rate by a significant 0.75 percentage point at its next meeting in November. If so, it would be the fourth consecutive climb of this kind.The inflation statistics from the report presented on Friday were consistent with those reported earlier this month, with core prices rising faster than overall inflation. While core prices have increased, the overall inflation rate has been held steady by persistently high costs for housing, cars, and services like healthcare and haircuts.
Consumer expenditure increased by 0.1 percent in August after declining somewhat in July, when inflation was taken into account.According to the statistics released on Friday, personal income increased by 0.3% in August for the second consecutive month. After a substantial 0.5 percent jump in July, disposable income—what is left over after taxes—slightly increased by 0.1 percent when adjusted for price hikes.
However, over a longer period of time, incomes lag behind inflation. The quarterly change in disposable income after adjusting for inflation was 1.5 percent on an annual basis.Fed activity
With its fastest set of interest rate increases in four decades, the Federal Reserve is attempting to get inflation under control. The benchmark short-term rate has increased from almost zero in March to a range of 3% to 3.25 percent, which is the highest level since early 2008.
Jerome Powell, the chair of the Fed, and other officials have emphasized the Fed's commitment to bringing prices down repeatedly, even if their rate rises led to job losses and an increase in the unemployment rate.
The Fed wanted to lessen inflation pressures in the economy by slowing borrowing and spending with its interest rate rises.Global inflation has increased, which has exacerbated the economic and financial unrest in the UK, Europe, and a number of developing nations, like Turkey and Argentina.
Also on Friday, the 19 nations that use the euro currency revealed that inflation had risen 10% from a year earlier due to rising costs for electricity and natural gas. Following Russia's invasion of Ukraine, European nations are experiencing an energy shortage as a result of Russia's reduced natural gas exports to the EU.
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