Solid Growth of US Consumption Despite Macroeconomic Challenges

U.S. consumer spending increased slightly more than expected in August, helping to keep the economy stable as the third quarter gains momentum. Meanwhile, inflation shows moderate growth. Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.6% last month after rising a steady 0.5% in July, the Commerce Department's Bureau of Economic Analysis reported on Friday. Economists had forecast a growth of 0.5%. Despite a noticeable downturn in the labor market, consumption remains robust, driven by high-income households whose wealth is bolstered by a strong stock market and still high real estate prices. Recent data from the Federal Reserve show that household wealth rose to a record $176.3 trillion in the second quarter. Meanwhile, lower-income households are struggling with the burden of higher prices caused by import tariffs. Future cuts to government nutrition programs further exacerbate the situation. Ryan Sweet, Chief Economist at Oxford Economics, suggests that the development of consumer spending heavily depends on household wealth, which poses risks should the stock and real estate markets lose momentum. Strong consumer spending led to a 3.8% growth in the gross domestic product in the second quarter on an annual basis, the highest rate in almost two years. A moderate growth of about 2.5% is expected for the third quarter. Economists anticipate that consumer spending will slow significantly by the end of the year, driven by rising prices. Inflation has so far responded sluggishly to the extensive tariff increases by former President Donald Trump, as many companies built up inventories ahead of the tariffs. The personal consumption expenditures price index, which rose 0.3% in August, shows a year-over-year increase of 2.7%. Core inflation, excluding volatile components such as food and energy, increased by 2.9%. The Federal Reserve's benchmark interest rate was last reduced by 25 basis points and is currently between 4.00% and 4.25%. Fed Chairman Jerome Powell pointed out the challenges posed by rising risks to inflation and employment during the current week.