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Consumer spending and inflation both up in July

A government report suggests the economy is still growing

Photo (c) YakobchukOlena - Getty Images
On the heels of the Conference Board's finding that consumer confidence is at an 18-year high, the government reports consumers increased their spending again in July.

The Commerce Department's Bureau of Economic Analysis (BEA) reports consumer spending rose 0.4 percent in July, matching June's increase. As a result, government economists say it put upward pressure on prices. The underlying inflation rate hit 2 percent in July, which is right where the Federal Reserve wants it.

Economists say the strong spending number suggests the economy is still expanding in the third quarter, after the government this week reported second quarter gross domestic product (GDP) rose 4.2 percent.

The numbers are likely to keep the Federal Reserve on its path of slowly raising interest rates, a policy recently criticized by President Trump as potentially harmful to the economy. But Fed Chairman Jerome Powell has defended the policy, saying the economy is growing to the point that it no longer needs cheap money.

Two headwinds

Economists say the economy is doing well in spite of two headwinds – the impact of the trade war and a slowdown in the housing market. In terms of the latter, Economist Joel Naroff says the slowdown may have a silver lining for people looking for a home.

“With housing sales ebbing, it should not be surprising that the surge in prices is fading as well,” Naroff wrote in his blog. “The S&P CoreLogic Case-Shiller national home price index rose modestly in June. Over the year, prices are still going up solidly, but it looks like the rate of gain may have peaked.”

But houses may be the only thing that isn't getting more expensive. The BEA data shows a rising trend in the personal consumption index (PCE) in July, double the increase from June.

The year-over-year increase of the core PCE price index, which excludes food costs, rose slightly from June and hit the Fed's 2 percent target for the second month this year.

Incomes lagging

Consumers may be spending more, but they aren't earning that much more. July's personal income rose 0.3 percent in July, slightly lower than June's gain. The savings rate declined from 6.8 percent to 6.7 percent.

That suggests much of the increase in July consumer spending was done with credit cards, which isn't a problem as long as consumers can pay it back.

In one troubling note, however, a new study by NerdWallet suggests consumers were having a difficult time paying for last year's holiday purchases. According to the study, credit card delinquencies totaled $23 billion in the first quarter of the year.

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