July Consumer Spending Accelerates; Annual Core Inflation Hits Highest Since February

11:08 AM EDT, 08/29/2025 (MT Newswires) -- US consumer spending rose in July at the fastest pace since March, while the Federal Reserve's preferred inflation metric increased annually to the highest level in five months, government data showed Friday.

Personal consumption expenditures increased 0.5% last month, the Bureau of Economic Analysis reported. The latest result, which was in line with a Bloomberg-polled consensus, rose from June's upwardly revised increase of 0.4%.

"Consumers entered the second half of the year with decent momentum," Ksenia Bushmeneva, economist at TD Economics, said in a note. "This suggests that third quarter growth in consumer spending could come in around 1.7% -- an upgrade relative to our previous 1.1% tracking."

On Thursday, the BEA's second estimate showed that the world's largest economy expanded in the second quarter at the fastest pace in nearly two years amid stronger consumer spending and business investment than previously expected.

The annual headline PCE price index held steady at 2.6% last month, while inflation decelerated sequentially to 0.2% from 0.3%, the BEA reported Friday. Both prints were in line with market estimates.

The Fed's preferred core measure, which excludes food and energy, accelerated to 2.9% in July from 2.8% the month prior, marking the largest annual gain since February. Sequentially, the core measure remained unchanged at 0.3%. Both measures met consensus expectations.

Last week, Fed Chair Jerome Powell struck a more dovish tone than expected during his Jackson Hole speech, indicating a possible policy pivot to lower rates. At the time, Powell highlighted downside risks to employment and suggested that tariff-driven inflation pressures may prove transitory.

Markets are currently pricing in an 89% probability that the central bank will cut its benchmark lending rate in September, according to the CME FedWatch tool.

Goods spending advanced 0.8% in July following a 0.3% gain the month prior, as outlays turned positive for durables, helping offset a slowdown in the nondurable category, BEA data showed Friday. Services spending growth remained unchanged at 0.4%.

"Until now, businesses have largely avoided passing on higher costs by stockpiling inventories, substituting away from highly tariffed imports, or absorbing the increases themselves," TD's Bushmeneva said. "These strategies aren't sustainable indefinitely, and we expect greater passthrough of tariff-related price increases in the coming months."

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