BUSINESS – July witnessed the strongest increase in U.S. consumer spending in four months, accompanied by a warming in services-sector inflation, though the Federal Reserve is still expected to proceed with an interest rate cut next month amid softer labor market conditions.
According to the Reuters, Commerce Department said, consumer spending which drives over two-thirds of U.S. economic activity grew at a robust 0.5% in July, rebounding from an upwardly revised 0.4% gain in June. Meanwhile, the core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.3% in July, its highest monthly advance since February, and climbed to 2.9% year-on-year, up from 2.8% in June.
Despite elevated services inflation, economists believe the Fed will still proceed with a 25 basis point cut in September. RSM chief economist Joseph Brusuelas noted that inflation in services remains “sticky” but expects the Fed’s path forward to remain intact amid signs of economic moderation.
Read More: U.S. to Acquire 10% of Intel in Bold National Security Move
Underlying the spending surge was income growth that helped bolster inflation-adjusted outlays. As AP News reports, real consumer spending rose 0.3%, with wages jumping 0.6% and real disposable income increasing 0.2% factors that likely supported household resilience even as service costs grew.
Markets responded calmly to the PCE data. S&P 500 futures held steady, Treasury yields inched upward, and the U.S. dollar remained stable. Investors continue pricing in a high probability around 85% or more—of a Fed rate reduction in September. Wall Street’s optimism is buoyed by these signs of continued consumer strength and inflation that remains close to, though still above, the Fed’s 2% target. As one market strategist put it, “This morning’s PCE data should only increase the probability of a Fed rate cut next month”.
Overall, July’s economic data paint a picture of a resilient consumer base helping underpin growth. While firm services inflation adds nuance to the Fed’s decision-making, most observers expect monetary easing to begin soon, assuming upcoming inflation and labor data don’t deliver surprises.
