U.S. Consumer Spending Rises in July as Services Inflation Picks Up
U.S. consumer spending rose at the fastest pace in four months in July, while services inflation also gained momentum. Despite the signs of strong domestic demand, economists believe the Federal Reserve is still likely to cut interest rates next month as labor market conditions soften.
The Commerce Department report on Friday showed only mild inflationary pressure from new tariffs on imports. Economists explained that these tariffs have been slow to pass through to consumer prices because many businesses are selling inventory purchased before President Donald Trump’s duties took effect. In some cases, companies are also absorbing the added costs.
Joseph Brusuelas, chief economist at RSM, noted that sticky service inflation is creating a challenging backdrop for the Fed. “We expect a difficult September policy decision, with the Fed likely cutting rates by 25 basis points,” he said.
According to the Bureau of Economic Analysis, consumer spending — which makes up over two-thirds of U.S. economic activity — rose 0.5% in July. That followed a revised 0.4% increase in June and beat expectations. Motor vehicle purchases were a major driver, lifting durable goods spending by 1.9%. Shoppers also spent more on clothing, footwear, furniture, and food, though gasoline and energy outlays declined.
Overall spending on goods rose 0.8%, while services spending increased 0.4%, supported by healthcare, housing, and financial services. However, spending at restaurants, bars, and hotels fell slightly.
Wage growth helped support household consumption, with personal income rising 0.6% in July. Still, employment growth has slowed sharply. Over the past three months, job gains have averaged just 35,000 per month, compared with 123,000 during the same period in 2024. A Conference Board survey also showed more consumers viewing jobs as “hard to get,” the highest level in more than four years.
Fed Chair Jerome Powell has already signaled that a rate cut is possible at the September 16–17 policy meeting, acknowledging the risks to the labor market while keeping a close eye on inflation.
The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, rose 0.2% in July after a 0.3% increase in June. On a yearly basis, the PCE rose 2.6%. Core PCE inflation, which excludes food and energy, advanced 0.3% in July and 2.9% year-on-year, the largest increase since February.
While consumer demand remains strong, it has also driven a surge in imports. The U.S. goods trade deficit widened by 22.1% to $103.6 billion in July, as imports jumped to $281.5 billion while exports dipped slightly. Economists expect this rebound in imports could limit the boost that consumer spending provides to third-quarter GDP growth.
The U.S. economy expanded at a 3.3% annualized pace in the second quarter, rebounding from a contraction earlier in the year that was tied to tariff-related trade distortions.
