Hot Spending Data Puts Fed in a Tight Spot
The real surprise came from consumer spending, which makes up more than two-thirds of U.S. economic activity
Quick overview
- U.S. consumer spending rose 0.6% in August, exceeding expectations and indicating strong demand in the economy.
- Inflation remained stable at 2.7% year-over-year, with services contributing significantly to the increase.
- Personal incomes and wages grew in August, but at a slower pace, suggesting some cooling in the economy.
- The Federal Reserve's path for rate cuts remains uncertain as markets weigh the implications of strong demand against stable prices.
U.S. consumer spending rose more than expected in August as price pressures remained stable, though the latest data raises questions about how many more rate cuts the Federal Reserve may deliver this year.
Inflation in the U.S. came in at 2.7% year-over-year, according to the Personal Consumption Expenditures (PCE) price index—the Fed’s preferred measure of inflation. Personal spending also exceeded forecasts, signaling that consumer demand remains strong across the economy.
The annual PCE reading was broadly in line with analysts’ expectations, slightly above July’s 2.6%. On a monthly basis, prices rose 0.3% after a 0.2% gain the previous month. Services once again accounted for nearly all of the yearly increase, contributing 2.4 percentage points, while in the monthly measure they added 0.21 points. Core PCE, which excludes food and energy, matched forecasts: 0.2% monthly and 2.9% year-over-year.
Stronger Spending
The real surprise came from consumer spending, which makes up more than two-thirds of U.S. economic activity. Outlays rose 0.6% in August, following a 0.5% gain in July and beating expectations for another 0.5% rise.
The resilience reflects stronger demand among higher-income households, supported by a buoyant stock market and elevated home prices. Meanwhile, lower-income households continue to face pressure from higher costs and reduced food assistance programs.
Fed Rate Path in Question
Personal incomes, wages, and salaries also increased in August, though at a slower pace than in July—suggesting some cooling, but not a significant slowdown. With inflation largely stable and consumption strong, the data gives the Fed room to continue with rate cuts this year.
Still, the balance is delicate: stronger demand without a flare-up in prices is unusual, and markets remain uncertain over whether the Fed will feel comfortable pushing ahead with multiple cuts before year-end.
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