Consumer spending rose in August; inflation muted

By Reuters
Posted Oct. 1, 2010 at 7:58 a.m.

Consumer spending rose slightly more than expected in August, but inflation remained subdued, leaving the door open for the Federal Reserve to launch a fresh round of monetary policy easing.

The Commerce Department said on Friday spending increased 0.4 percent after rising by the same margin in July. Analysts polled by Reuters had forecast spending, which accounts for about 70 percent of U.S. economic activity, rising 0.3 percent in August.

The Federal Reserve’s preferred measure of consumer inflation — the personal consumption expenditures price index, excluding food and energy — rose only 0.1 percent for a fourth straight month.

In the 12 months through August, the core PCE index increased 1.4 percent for the third consecutive month.

The Fed warned last week that underlying inflation was below levels policy makers viewed as consistent with the U.S. central bank’s mandate of full employment and price stability.

It said it was ready to pump more money into the economy to shore up growth and avert a harmful downward spiral in prices.

A 9.6 percent unemployment rate and shrinking household wealth as the economy struggles to recover from the worst recession since the Great Depression are crimping spending.

In August, spending was supported by a 0.5 percent rise in personal income, the largest rise since December, the Commerce Department report showed. The rise in incomes was above market expectations for a 0.3 percent increase and followed a 0.2 percent gain in July.

Spending adjusted for inflation rose 0.2 percent after a similar gain in July. The fourth straight month of gains offered hope that consumer s continued to prop up economic growth in the third quarter. Spending grew at an annual 2.2 percent pace in the second quarter, with overall gross domestic product expanding at a 1.7 percent rate, the government reported on Thursday.

With spending a touch below the 0.5 percent rise in disposable income, the saving rate edged up to 5.8 percent from 5.7 percent in July. Savings rose to an annual rate of $661.9 billion.

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