US Consumer Spending, Income Rise, But Inflation Remains Subdued

Household spending climbed more than forecast in August and incomes also rose as the biggest part of the U.S. economy continued to power past a global slowdown.

Consumer purchases climbed 0.4 percent, matching the gain in July that was larger than previously reported, Commerce Department figures showed Monday. The median forecast of economists in a Bloomberg survey called for a 0.3 percent August increase. Incomes advanced 0.3 percent.

By maintaining spending, consumers are helping the U.S. overcome international risks that threaten to weigh on growth. Solid gains in the labor market, combined with cheap gasoline and modestly growing incomes, should continue to boost consumption, which accounts for 70 percent of the economy.

“The energy dividend from low oil prices will fall right through to consumers’ purchasing power,” Aneta Markowska, chief U.S. economist at Societe Generale in New York, said before the report. “We’re anticipating a few quarters of strong consumer spending.”

Projections for spending ranged from gains of 0.2 percent to 0.5 percent. The previous month’s reading was initially reported as a 0.3 percent increase.

The Bloomberg survey median called for incomes to rise 0.4 percent. July’s income reading was revised to a 0.5 percent gain, the biggest advance since November and compared with a previously reported 0.4 percent increase.

The report showed the price index tied to consumer spending was unchanged in August. From a year earlier, the gauge was up 0.3 percent. This inflation measure is preferred by Federal Reserve policy makers.

Stripping out the volatile food and energy components, the price measure rose 0.1 percent from the month before and 1.3 percent in the 12 months ended August.

Inflation Goal

Inflation has stayed stubbornly below the central bank’s 2 percent target since 2012, which makes it harder for the Fed to justify tighter policy. Earlier this month central bankers decided to keep their benchmark interest rate unchanged.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Fed said in a statement. In a speech last week, Fed Chair Janet Yellen also said she is ready to raise interest rates this year and intends to let the labor market run hot for a while to heal the lingering damage from the recession.

That’s probably welcome news to American households, for whom job gains have been a major driver of spending as income growth remains middling. Employers have added an average 212,000 workers to payrolls each month this year, more than enough to keep reducing slack in the labor market, economists have said.


Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell