Consumer Spending Rises in August; Core Inflation Firms

By Jason Lange

WASHINGTON -- U.S. consumer spending grew briskly in August and a key measure of inflation firmed a bit, signs of strength in America's domestic economy that could lead the Federal Reserve to tighten interest rates despite weakness abroad.

The Commerce Department said Monday that consumer spending increased 0.4 percent after an upwardly revised 0.4 percent rise in July.

The figures give a bullish sign for economic growth in the third quarter.

"These data underscore the ongoing health of the consumer sector," said John Hoff, an economist at RBS Securities.

The report could help convince investors of Fed Chair Janet Yellen's view, most recently expressed on Thursday, that the economy was strong enough to warrant a rate increase this year. New York Fed President William Dudley also said Monday that a hike was likely this year and could come as soon as October.

%VIRTUAL-WSSCourseInline-876%Investors have been doubtful, with many betting that the Fed's first rate increase in a decade won't come until March.

But the U.S. dollar firmed following the consumer spending report, as did yields on U.S. government debt, signs that some investors were bringing forward their bets on a rate increase.

Economists polled by Reuters had forecast consumer spending rising 0.3 percent last month. Consumer spending accounts for more than two-thirds of U.S. economic activity.

It was the latest report indicating momentum in the economy as it confronted recent global financial markets turbulence, sparked by concerns over a slowing Chinese economy, which pushed the Fed to hold off hiking rates earlier in September.

The economy grew at a robust 3.9 percent annual rate in the second quarter.

Last month, spending on long-lasting goods such as automobiles increased 0.9 percent. Outlays on services like utilities rose 0.5 percent.

Personal income increased 0.3 percent in August.

Overall inflation remained muted, reflecting low oil prices. Inflation, which has persistently run below the Fed's 2 percent target in annual terms, rose just 0.3 percent in August from the same month a year earlier.

However, prices were up 1.3 percent when excluding food and energy, a key metric used by the Fed to gauge the trend rate of inflation. In July, core prices rose 1.2 percent year-over-year.

Despite the positive signals for consumer spending, the U.S. housing market appeared to loose a step last month, with contracts to buy previously owned U.S. homes falling 1.4 percent.