July Consumer Spending Rises 0.5% Amid Persistent Inflation and Robust Auto Sales

Data released Friday indicates that American consumers maintained their spending levels in July, despite elevated inflationary pressures. Consumer spending saw a 0.5% uptick from June’s figures, slightly below the anticipated 0.6% increase, but slightly above the preceding month’s 0.4% growth rate. July's patterns of spending were notably influenced by summer sales events, including Amazon's Prime Day, alongside the back-to-school shopping season. Primarily driving this spending increase were purchases of automobiles and financial services, supported by a robust stock market.

After accounting for inflation, consumer spending increased by 0.3% in July, following a meager 0.1% rise in June. Analysts highlight that solid consumer spending indicates moderate goods inflation and the tariff conflict hasn't significantly hampered economic growth.

The Federal Reserve's preferred inflation metric, the Personal Consumption Expenditures (PCE) price index, exhibited a monthly rise of 0.2%, maintaining its annual rate at 2.6%. The core PCE price index, excluding volatile categories such as food and energy, indicated a 0.3% monthly increase, consistent with previous months, and accelerated to an annual rate of 2.9% from 2.8%.

Economic forecasts matched the inflation data released in July, suggesting a stable inflation trend. Income gains were instrumental in sustaining the spending levels, as personal income rose 0.4% in July, up from 0.3% in June, driven by rising wages. The savings rate remained at 4.4%.

July marked the first month since March where consumer expenditures surpassed income. Observers noted that the willingness of American consumers to spend during such times is primarily directed towards durable goods, such as appliances and cars. The rebound in auto-related purchases was significant, along with modest real (inflation-adjusted) spending increases in areas including home furnishings and recreational goods.

Analysts pointed out that July's growth in durable goods spending was the highest since pre-tariff spikes in March. This growth counters previous apprehensions about tariffs affecting durable goods spending, as evidenced by consecutive declines in May and June. Despite the enthusiastic spending on durable goods, the area of discretionary spending showed pullbacks, reflective in the minimal growth in recreational services and reduced expenditures in hotels and restaurants.

July's inflation trajectory mirrored patterns seen in the Consumer Price Index and Producer Price Index, indicating a pace of price increases that remains above expected levels and Federal Reserve targets. Businesses are beginning to pass higher tariffs costs to consumers, projecting a gradual effect over the next six months. The tariff impact has been slow due to the limited flexibility of middle-class budgets to accommodate extra costs. Unlike 2022, consumer resilience appears to weaken in the face of ongoing price hikes.

Price increases driven by tariffs were predicted to be gradual, as businesses stocked inventory ahead of tariff implementations, some tariffs faced delays or exemptions, and businesses absorbed some costs through profit margins. Despite these measures, the sustained pace of inflation poses challenges, potentially ushering the U.S. into a ‘stagflation-lite’ period characterized by high inflation, stagnant growth, and increasing unemployment.

Concerns are raised regarding the prospects of layoffs due to higher costs prompting cost-cutting by businesses. Analysts suggest that the Federal Reserve should consider rate cuts in September and December to mitigate the potential economic slowdown and possible workforce reductions.