U.S. consumer spending rose 0.5 per cent last month, the Commerce Department said.Mark Makela/Reuters
U.S. consumer spending increased solidly in July while underlying inflation picked up as tariffs on imports raised prices of some goods, but that data will probably not prevent the Federal Reserve from cutting interest rates next month against the backdrop of softening labour market conditions.
Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.5 per cent last month after an upwardly revised 0.4 per cent gain in June, the Commerce Department said on Friday. Economists polled by Reuters had forecast spending would rise 0.5 per cent after a previously reported 0.3 per cent advance in June.
Consumption is being supported by low layoffs that are underpinning solid wage growth. But President Donald Trump’s sweeping tariffs on imports are raising costs for businesses, adding another layer of caution that has resulted in employers being reluctant to increase head count.
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Employment gains have averaged 35,000 jobs per month over the last three months through July compared to 123,000 during the same period in 2024, the government reported this month.
A survey from the Conference Board on Tuesday showed the share of consumers viewing jobs as “hard to get” jumped to a 4½-year high in August. Fed Chair Jerome Powell last week signalled a possible rate cut at the U.S. central bank’s Sept. 16-17 policy meeting, in a nod to increasing labour market risks, but also added that inflation remained a threat.
The Fed has kept its benchmark overnight interest rate in the 4.25 per cent-4.50 per cent range since December. High prices from import duties have been slow to feed through to inflation as businesses are still selling stocks accumulated before the tariffs kicked in. Businesses have also been absorbing some of the costs.
Economists expect that situation will soon change. There was an inventory drawdown in the second quarter. Companies from retailers to motor vehicle manufacturers have warned that tariffs were raising their costs, which economists expect would eventually be passed on to consumers.
The Personal Consumption Expenditures (PCE) Price Index increased 0.2 per cent last month after an unrevised 0.3 per cent rise in June, the BEA said. In the 12 months through July, the PCE Price Index rose 2.6 per cent, matching the gain in June.
Excluding the volatile food and energy components, the PCE Price Index increased 0.3 per cent last month, matching the rise in June. In the 12 months through July, the so-called core inflation figure advanced 2.9 per cent after increasing 2.8 per cent in June.
The Fed tracks the PCE price measures for its 2 per cent inflation target.