US consumer spending rose at a sluggish pace in July, even while Americans got some relief on prices, indicating the economy is feeling the pinch from the highest inflation in a generation.
Purchases of goods and services, adjusted for changes in prices, increased 0.2% after being flat a month earlier, Commerce Department data showed Friday. Spending on both merchandise and services advanced. The median estimate in a Bloomberg survey of economists was for a 0.4% advance.
Consumer spending was subdued in July, inflation negative on gas drop
The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, fell 0.1% from a month earlier, the first negative print since the start of the pandemic. That in part reflected a notable drop in energy prices, while food costs continued to rise.
From a year ago, the gauge was up 6.3%, still a long ways from the central bank’s 2% target.
Excluding food and energy, the price index was up 0.1% in the month. The core measure was up 4.6% from a year ago, a slight deceleration from the previous month.
The weaker-than-expected report suggests the backbone of the economy started the third quarter on rockier footing than previously thought. While a robust labor market paired with sizable and sustained wage increases has supported consumer spending in recent months, widespread inflation is eroding those gains.
And the outlook is growing increasingly murky. The Fed is aggressively raising interest rates to tackle price pressures, and the ensuing surge in mortgage rates has prompted a sharp slide in the housing market. The trajectory of consumer spending will largely determine the path of the overall economy.
Even though the Fed’s headline inflation figure eased, wages and salaries rose a robust 0.8% in July, the most since February. That may spur further concerns about inflation becoming entrenched in the economy, as companies tend to pass on such costs to consumers.
The saving rate was unchanged at 5%, still the lowest since 2009, according to the report.
Later this morning, Fed Chair Jerome Powell will discuss the economic outlook at the annual Jackson Hole symposium. He’s expected to reiterate the central bank’s resolve to keep raising interest rates to get inflation under control, a sharp pivot from his speech last year, in which he emphasized price pressures would likely prove transitory.