Customers browse in an Apple store in New York. The Commerce Department yesterday issued its July report on consumer spending, which showed a sharp surge. Image Credit: AP file

WASHINGTON: US consumer spending increased solidly in July, pointing to strong economic growth early in the third quarter, while a measure of underlying inflation hit the Federal Reserve’s 2 per cent target for the third time this year.

Other data on Thursday showed an increase in new applications for unemployment benefits last week, but the underlying trend continued to point to a robust labour market.

Strong domestic demand, rising inflation and a tightening jobs market likely will keep the US central bank on course to increase interest rates for a third time this year in September.

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4 per cent last month after advancing by the same margin in June. Households spent more at restaurants and on accommodation last month.

There was also an increase in spending on prescription medication. Economists polled by Reuters had forecast consumer spending rising 0.4 per cent in July.

With demand strong last month, prices continued their gradual upward trend. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2 per cent after edging up 0.1 per cent in June.

That lifted the year-on-year increase in the so-called core PCE price index to 2.0 per cent from 1.9 per cent in June. The core PCE index is the Fed’s preferred inflation measure. It hit the US central bank’s 2 per cent inflation target in March for the first time since April 2012.

Minutes of the Fed’s July 31-Aug. 1 meeting published last week showed some policymakers worried “a prolonged period in which the economy operated beyond potential could give rise to inflationary pressures.” The dollar was largely unchanged against a basket of currencies after the data. US stock index futures were trading lower while prices of US Treasuries were higher.

Strong consumer spending helped fire up economic growth in the second quarter, with gross domestic product rising at a 4.2 per cent annualised rate, the fastest in nearly four years and almost double the 2.2 per cent pace notched in the January-March quarter.

Solid consumer spending should blunt some of the impact on the economy from an anticipated widening in the trade deficit and weakness in the housing market in the third quarter. Recent data showed a sharp rise in the goods trade deficit in July as well as further declines in home sales and a moderate rise in homebuilding last month.

Consumer spending, which grew at a 3.8 per cent annualised rate in the April-June period following a pedestrian 0.5 per cent pace in the first quarter, is being supported by the labour market, which is viewed as being near or at full employment.

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 213,000 for the week ended Aug. 25, the Labor Department said on Thursday. Economists polled by Reuters had forecast claims rising to 214,000 in the latest week.

The four-week moving average of initial claims, considered a better measure of labour market trends as it irons out week-to-week volatility, fell 1,500 last week to 212,250, the lowest level since December 1969.

There are no signs so far in the claims data that the Trump administration’s protectionist trade policy, which has led to an escalating trade war with China and tit-for-tat import tariffs with other trading partners, including the European Union, Canada and Mexico, is hurting the labour market.

Economists have warned that the tariffs could undermine business spending, disrupt the supply chain as well as raise prices of some goods.

In July, spending on goods rose 0.2 per cent after slipping 0.1 per cent in June. Outlays on services increased 0.4 per cent after surging 0.6 per cent in the prior month.

Personal income rose 0.3 per cent in July after increasing 0.4 per cent in the prior month. Wages gained 0.4 per cent. The saving rate slipped to 6.7 per cent last month from 6.8 per cent in June.

— Reuters