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 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.
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.
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.
9 Numbers That'll Tell You How the Economy's Really Doing
Consumer Spending Rises in August; Core Inflation Firms
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.