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U.S. Consumer Spending Rose 0.4% in August Despite High Inflation

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Woman shopping and paying with a debit or credit card. | Image by ESB Professional, Shutterstock

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The U.S. saw an uptick in consumer spending in August, despite decades-high inflation pushing the cost of goods and services higher month over month.

The Commerce Department on Friday released its Personal Consumption Expenditures (PCE) report showing that consumer spending increased by $67.5 billion or 0.4% in August after falling 0.2% in July. The PCE report is a broad measure of consumer spending on goods and services.

Consumer spending accounts for roughly two-thirds of total U.S. economic output, and even though inflation continues to cause people to pay more for goods and services, U.S. consumers have remained surprisingly resilient to its effects, according to the report.

The $67.5 billion increase reflected an increase of $96.9 billion in spending on services like rent, utilities, transportation, and health care. This was partly offset by a decrease of $29.4 billion in spending on gasoline and other energy goods, the Commerce Department’s report said.

The Federal Reserve uses the PCE Price Index as its preferred gauge of inflation to determine whether or not high inflation has become entrenched in the economy. When measuring the PCE Price Index, consumers saw the overall index increase by 0.3% month over month and by 0.6% when excluding the volatile food and energy category, according to the report.

On an annual basis, PCE rose by 6.2% from a year earlier, a slight decrease from the 6.4% reported in July. Still, the report is a worrying sign for monetary policymakers who fear that consumers have started to expect and anticipate higher prices, a self-fulfilling phenomenon the Fed desperately wants to avoid.

“The near-term outlook remains modest at best,” said Scott Hoyt, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Rising interest rates will make new borrowing more expensive, undermining spending on big-ticket items typically bought on credit.”

With inflationary effects sending the cost of goods and services soaring, wages have also shown a moderate increase. Wages increased 0.3% after surging 0.8% in July, while personal income rose by 0.3% in August and July, respectively. The savings rate fell to 3.5% in August, a 1.5% decrease from July and the lowest rate since the 2007-09 Great Recession.

“It looks like consumers have been eating into the ‘excess saving’ built up over the earlier stages of the pandemic to fuel recent spending,” said Daniel Silver, an economist at JPMorgan in New York.

U.S. consumers aren’t just dealing with higher prices for goods and services. They are struggling with rising interest rates, the lingering effects of the COVID-19 pandemic, domestic supply chain disruptions, and fears of an upcoming recession.

“More pain lies ahead as the economy heads toward a moderate downturn in the first half of next year,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “This will eventually cool inflation, but not before the Fed takes a few more swings at the tightening can.”              

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