US consumers spent more than expected in August, while a key measure of inflation eased to the slowest pace in three-and-a-half years, according to the US Commerce Department.
The department reported today that consumer spending rose by 0.6 per cent in August, the best showing in four months and better than the 0.4 per cent increase that had been expected. Incomes rose by 0.3 per cent last month, slightly lower than had been expected.
A closely watched gauge of inflation was up just 1.8 per cent in August, compared to the same period a year ago, the smallest increase since a similar rise in February 2004.
The strength in consumer spending should bolster confidence that the economy will be able to withstand the worst housing slump in 16 years, a serious credit crunch and an unexpected loss of jobs in August. Consumer spending accounts for two-thirds of total economic activity.
The Federal Reserve last week cut a key interest rate by one-half point, a bigger drop than had been expected, in an effort to make sure that the housing and credit problems don't push the country into a recession.
Analysts are hoping that rate cut will be just the first in a series of reductions as falling inflation pressures give the central bank the leeway to focus on weakening growth.
The 1.8 per cent rise in core inflation over the past 12 months, which excluded energy and food, is within the Fed's comfort zone for core price increases of between 1 per cent and 2 per cent.
Core inflation had been above the Fed's target range through the spring of this year. It peaked at a 2.5 per cent increase in February.
Excluding inflation, consumer spending also rose by 0.6 per cent in August, the best inflation-adjusted performance since last October. Much of the strength in spending came from a big jump in auto sales, which were driven higher by incentives dealers offered to clear out showrooms in advance of the new model year.
Employment fell by 4,000 payroll jobs in August, the first employment drop in four years.