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U.S. consumer spending barely rises; core inflation moderates

By Lucia Mutikani

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending barely rose in August likely as Hurricane Harvey weighed on auto sales and annual inflation increased at its slowest pace since late 2015, pointing to a moderation in economic growth in the third quarter.

The weak report from the Commerce Department on Friday did little to change expectations that the Federal Reserve would raise interest rates in December. Chair Janet Yellen said on Tuesday the Fed needed to continue gradual rate hikes despite uncertainty about the path of inflation.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1 percent last month also as unseasonably mild temperatures in some parts of the country reduced demand for utilities. That followed an unrevised 0.3 percent increase in July.

August's gain in consumer spending was in line with economists' expectations. When adjusted for inflation, consumer spending slipped 0.1 percent in August, the first drop since January.

The government said the data reflected the effects of Hurricane Harvey. However, it could not separately quantify the total impact of Harvey on the data. It said it made adjustments to estimates where source data were not yet available or did not fully reflect the effects of the storm.

The dollar fell to a session low against a basket of currencies after the data, while prices for U.S. Treasuries rose.

The report was the latest suggestion that Harvey, together with Hurricane Irma, would dent economic growth in the third quarter. The economy grew at a brisk 3.1 percent annualized rate in the second quarter, with consumers doing the heavy lifting.

Harvey, which tore through Texas in late August, has undercut industrial production, homebuilding and home sales. Further declines are expected after Irma slammed Florida in early September.

Economists estimate the storms could slice off as much as six-tenths of a percentage point from third-quarter GDP growth. However, a pick-up in output is expected in the fourth quarter as communities ravaged by the hurricanes rebuild.

TAME INFLATION

Inflation remained benign in August, with the personal consumption expenditures (PCE) price index excluding food and energy rising 0.1 percent. The so-called core PCE has advanced by the same margin for four straight months.

As a result, the annual increase in the core PCE price index slowed to 1.3 percent in August after advancing 1.4 percent in July. That was the smallest year-on-year increase since November 2015. The core PCE is the Fed's preferred inflation measure and has a 2 percent target.

The U.S. central bank signaled last week it anticipated one more interest rate increase by the end of the year. It has increased borrowing costs twice this year. Financial markets were pricing a roughly 71 percent probability of an interest rate hike in December, compared with 76 percent earlier, according to the CME FedWatch tool.

Consumer spending last month was held back by a 1.1 percent decline in outlays on long-lasting goods. The Commerce Department said spending on new motor vehicles was the leading contributor to the drop in the so-called durable goods.

Auto manufacturers reported that Hurricane Harvey had impacted on sales in the last week of August.

Harvey also probably impacted on income in August.

Personal income rose 0.2 percent last month after increasing 0.3 percent in July. Wages were unchanged after increasing 0.5 percent in July.

Savings fell to $522.9 billion in August, the lowest level since December 2016, from $524.8 billion in the prior month.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)