With Core Inflation Steady, U.S Consumer Spending Beats Expectations

Consumer spending in the U.S. picked up more than expected in August, highlighting both the resilience of households and the persistence of inflationary pressures that continue to challenge policymakers.

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According to data released Friday by the Bureau of Economic Analysis, inflation-adjusted consumer outlays rose 0.4% in August, matching July’s increase. It marks the second straight month of solid gains in spending, underscoring the role of household demand in supporting the broader economy.

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At the same time, the core personal consumption expenditures price index the inflation gauge most closely monitored by the Federal Reserve because it strips out volatile food and energy categories advanced 0.2% from the prior month. On a year-over-year basis, the index held steady at 2.9%, signaling inflation is proving stickier than many had hoped.

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The back-to-back gains in consumption add to growing evidence that the economy remains on firm footing in the third quarter. This strength builds on even stronger growth in the previous quarter, which was recently revised higher.

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Still, whether consumers can sustain this pace largely depends on the health of the labor market. Hiring has slowed in recent months, and wage growth has moderated, raising concerns about how long households can keep spending at this clip. A softer job market could eventually dampen consumer confidence and spending momentum, two key drivers of U.S. economic growth.

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Even with spending showing resilience, Americans continue to grapple with inflation that remains above the Fed’s 2% target. One concern is the lingering impact of tariffs introduced under President Donald Trump’s trade policies. As those costs ripple through supply chains, they risk keeping inflation elevated for longer.

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Many businesses initially absorbed higher input costs by drawing down existing inventories rather than passing them on to consumers. But with margins under pressure, more companies may eventually raise prices, which could reignite inflationary pressures in the months ahead.

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For the Federal Reserve, the latest figures complicate the outlook. Inflation stuck near 3% leaves several policymakers cautious about moving too quickly on additional rate cuts. While the Fed lowered borrowing costs by a quarter point in September, further easing may depend on fresh signals from the labor market.

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The September jobs report will be a crucial factor in the Fed’s decision-making at its upcoming policy meeting. However, the possibility of a government shutdown raises uncertainty about whether officials will have access to timely employment data before deliberations begin.

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Financial markets responded positively to the spending report. Stock index futures climbed, reflecting optimism that steady consumer demand will continue to support corporate earnings. Meanwhile, Treasury yields held lower, with investors betting the Fed may still lean toward gradual rate cuts if economic data continues to soften.

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For investors, the picture is a mixed one. On the one hand, strong consumer spending suggests the economy retains momentum heading into year-end, which could be supportive for equities, especially in sectors tied to household demand. On the other, stubbornly high inflation and uncertainty over Fed policy keep bond markets in focus, with yields likely to remain sensitive to incoming data.

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The balance between resilient consumers and a cooling labor market will be crucial in determining the direction of both monetary policy and financial markets in the months ahead. If households keep spending but wage growth continues to cool, the Fed may find itself in a delicate position weighing the need to support growth while ensuring inflation doesn’t become entrenched above target.

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For now, the data sends a clear message: consumers are still powering the economy, inflation remains sticky, and the Fed’s next steps will depend heavily on how the labor market evolves.

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