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August 3, 2016

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US consumer spending rises strongly

US consumer spending rose more than expected in June as households bought a range of goods and services, suggesting consumption will likely remain strong after surging in the second quarter.

Despite healthy consumer spending, yesterday’s report from the Commerce Department showed inflation still muted. This could see a cautious Federal Reserve keeping interest rates at current low levels for a while.

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4 percent in June after a similar gain in May. Economists polled by Reuters had forecast consumer spending advancing 0.3 percent.

When adjusted for inflation, consumer spending rose 0.3 percent after climbing 0.2 percent in May.

The dollar trimmed losses against the euro and yen after the data. Prices for US government debt also pared losses, while US stock futures were trading lower.

The June data was included in last week’s second-quarter gross domestic product report, which showed that consumer spending rose at a 4.2 percent annual rate, the fastest in nearly two years. That jump accounted for almost all of the economy’s 1.2 percent growth pace during the period.

While the second-quarter’s robust pace of consumer spending will probably not be sustained, economists are optimistic that spending will remain solid, underpinned by steadily rising wages as the labor market tightens, as well as rising house and stock market prices.

There was little sign of inflation in June. The personal consumption expenditures price index, excluding the volatile food and energy components, rose 0.1 percent in June after a 0.2 percent gain in May.

In the 12 months through June the core PCE increased 1.6 percent. It has risen by the same margin since March. The core PCE is the Federal Reserve’s preferred inflation measure and is running below the US central bank’s 2 percent target.

Consumer spending in June was lifted by a 0.7 percent rise in purchases of non-durable goods. Spending on services gained 0.5 percent, but outlays on long-lasting manufactured goods such as automobiles fell 0.3 percent.

Spending rose despite personal income rising only 0.2 percent in June after a similar gain in May. Wages and salaries added 0.3 percent after rising 0.2 percent in May.


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