Consumers shrugged off a rash of bad news to spend more than expected in August while a key measure of inflation eased to the slowest pace in 3 1/2 years.
According to the Associated Press, the Commerce Department reported Friday that consumer spending rose by 0.6% in August, the best showing in four months and better than the 0.4% increase that had been expected. Incomes rose by 0.3% last month, slightly lower than had been expected.
A closely watched gauge of inflation was up just 1.8% 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 blows it has been receiving from 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% 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% and 2%.
Core inflation had been above the Fed’s target range through the spring of this year. It peaked at a 2.5% increase in February.