US 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 US economic activity, rose 0.5% last month after an upwardly revised 0.4% gain in June, the Commerce Department’s Bureau of Economic Analysis said today.
Economists polled by Reuters had forecast spending would rise 0.5% after a previously reported 0.3% 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 headcount.
Employment gains have averaged 35,000 jobs per month over the last three months to July compared to 123,000 during the same period in 2024, the government reported this month.
A survey from the Conference Board earlier this week showed the share of consumers viewing jobs as “hard to get” jumped to a four and a half year high in August.
Fed Chair Jerome Powell last week signaled a possible rate cut at the Fed’s September 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%-4.5% 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% last month after an unrevised 0.3% rise in June, the BEA said. In the 12 months to July, the PCE Price Index rose 2.6%, matching the gain in June.
Excluding the volatile food and energy components, the PCE Price Index increased 0.3% last month, matching the rise in June. In the 12 months to July, the so-called core inflation figure advanced 2.9% after increasing 2.8% in June.
The Fed tracks the PCE price measures for its 2% inflation target.
Reporting by Reuters
