US consumer spending is picking up; inflation rises moderately in July

WASHINGTON (Reuters) – U.S. consumer spending rose solidly in July, signaling the economy remained on firmer footing at the start of the third quarter and arguing against a half-percentage point interest rate cut by the Federal Reserve next month .

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after rising an unchanged 0.3% in June, the Commerce Department said Friday. Economists polled by Reuters had forecast spending would rise 0.5%.

This implies that consumer spending has retained most of the momentum from the second quarter, when it helped boost gross domestic product growth to 3.0% on an annual basis. The economy grew by 1.4% in the January-March quarter.

There are concerns about the health of the economy after the unemployment rate rose to near a three-year high of 4.3% in July. The fourth consecutive monthly increase in the unemployment rate prompted financial markets and some economists to call for a 50 basis point rate cut as the U.S. central bank embarked on a widely expected policy easing in September.

The slowdown in the labor market, mainly caused by a decline in hiring rather than layoffs, has attracted the attention of policymakers. Fed Chairman Jerome Powell said last week that “the time has come for policy adjustment.”

Most economists believe the Fed will resist a half-percentage-point rate cut as the economy continues to chug and inflation remains above the central bank’s 2% target, even as price pressures continue to ease.

The personal consumption expenditure (PCE) price index rose 0.2% last month, following an unchanged 0.1% increase in June, the report also showed. Economists had forecast PCE inflation to rise 0.2%. In the 12 months to July, the PCE price index rose 2.5%, matching June’s gains.

Excluding volatile food and energy components, the PCE price index rose 0.2% last month, similar to the increase in June. In the 12 months to July, core inflation rose 2.6%, after rising at a similar pace in June.

The Fed follows the PCE price measures for monetary policy and has maintained its policy rate within the current range of 5.25%-5.50% for more than a year, having raised it by 525 basis points in 2022 and 2023.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)