In­comes not keep­ing pace with spend­ing, in­fla­tion

The Atlanta Journal-Constitution - - BUSINESS - By Jeff Kearns Bloomberg News

U.S. con­sumer spend­ing ex­tended gains into July and in­fla­tion rose to a six-year high, re­flect­ing eco­nomic strength that should keep Fed­eral Re­serve pol­i­cy­mak­ers on track to keep grad­u­ally rais­ing in­ter­est rates.

Pur­chases, which ac­count for about 70 per­cent of the econ­omy, rose 0.4 per­cent from the prior month for the sec­ond straight time, match­ing econ­o­mists’ es­ti­mates, Com­merce Depart­ment fig­ures showed Thurs­day. In­comes ad­vanced 0.3 per­cent, less than pro­jected. The Fed­eral Re­serve’s pre­ferred mea­sure of in­fla­tion ticked up, as forecast, to a 2.3 per­cent an­nual gain, the most since 2012.

The read­ings on some of the broad­est gauges of the world’s largest econ­omy show con­sumers con­tin­ued driv­ing growth at the start of the third quar­ter while re­in­forc­ing that in­fla­tion is about where Fed pol­i­cy­mak­ers want it. A key mea­sure of un­der­ly­ing in­fla­tion hit 2 per­cent, match­ing the Fed’s goal for over­all price gains, as cen­tral bankers pen­cil in boost­ing bor­row­ing costs two more times this year, with one of those quar­ter-point hikes ex­pected in Septem­ber.

The spend­ing gain re­flected in­creases in out­lays on pre­scrip­tion drugs and food ser­vices, af­ter ear­lier re­tail-sales fig­ures showed large ad­vances in restau­rant re­ceipts. At the same time, in­fla­tion-ad­justed spend­ing on durable goods fell for the first time since February, with drops in au­to­mo­biles and ma­jor house­hold ap­pli­ances.

A sep­a­rate La­bor Depart­ment re­port Thurs­day showed fil­ings for un­em­ploy­ment ben­e­fits last week re­mained near the low­est level in al­most five decades, in­di­cat­ing em­ploy­ers are still re­luc­tant to fire workers. Ini­tial job­less claims rose 3,000 to 213,000, com­pared with the me­dian es­ti­mate of an­a­lysts for 212,000.

Price mea­sures were in line with an­a­lyst es­ti­mates. The Fed’s pre­ferred in­fla­tion gauge — tied to con­sump­tion — rose 0.1 per­cent from the pre­vi­ous month. Some Fed of­fi­cials have in­di­cated that they’re com­fort­able with an­nual in­fla­tion ex­ceed­ing their tar­get a bit, given that price gains were be­low their goal for most of the past six years.

Ex­clud­ing food and en­ergy, so-called core prices rose 0.2 per­cent from the prior month. The core in­dex, seen as a more re­li­able gauge of un­der­ly­ing in­fla­tion, was up 2 per­cent from July 2017, af­ter a 1.9 per­cent in­crease in June.

High­light­ing the ef­fects of ris­ing prices, in­fla­tion-ad­justed spend­ing rose 0.2 per­cent from the prior month, the slow­est pace since a de­cline in February.

Wages and salaries rose 0.4 per­cent for a sec­ond month, the July data show. Dis­pos­able in­come, or earn­ings ad­justed for taxes and in­fla­tion, ad­vanced 0.2 per­cent af­ter a 0.3 per­cent gain.

Pay­checks have been slow to show sus­tained progress even with ro­bust hir­ing and an un­em­ploy­ment rate hov­er­ing near the low­est since 1969. While lower taxes are help­ing con­sumers, the pickup in in­fla­tion is act­ing as a hur­dle.

In the sec­ond quar­ter, the econ­omy ex­panded at a 4.2 per­cent an­nu­al­ized rate, the fastest since 2014, with con­sump­tion re­bound­ing to a 3.8 per­cent pace, ac­cord­ing to re­vised data re­leased Wed­nes­day.

GABBY JONES / BLOOMBERG

Shop­pers browse the SoHo neigh­bor­hood of New York. The read­ings on some of the broad­est gauges of the world’s largest econ­omy show con­sumers con­tinue to drive growth.

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