US Consumer Spending Rises Amid Inflation and Deteriorating Sentiment

Recent economic data reveals a mixed landscape for the U.S. economy, with inflation and consumer spending playing pivotal roles. Inflation, as measured by the PCE price index, rose by 0.3% in August, reaching 2.7% year-over-year, indicating persistent but not accelerating inflation pressures that allow for the possibility of one more Federal Reserve rate cut before year-end. Meanwhile, consumer spending surprised to the upside with a 0.6% increase, supported by rising personal income, underscoring strong consumption despite souring consumer sentiment. This robust consumer spending also contributed to a revised higher estimate of U.S. economic growth at 3.8% annualized for the second quarter, reinforcing expectations that rapid interest rate cuts are unnecessary despite political pressures. However, risks remain, as consumer sentiment could wane amid a weakening labor market and uncertain trade policies, potentially dampening future growth. These dynamics complicate the Federal Reserve's interest rate decisions, balancing persistent inflation, resilient economic growth, and a softening labor market.