US consumer spending strong, core inflation warmer on services

The rise in the cost of services sent inflation excluding the volatile food and energy components rising at its fastest pace in five months

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US consumer spending increased by the most in four months in July while services inflation picked up, but economists did not believe strong domestic demand would prevent the Federal Reserve from cutting interest rates next month against a backdrop of softening labour market conditions.

The rise in the costs of services, mostly financial following a stock market rally, sent inflation excluding the volatile food and energy components rising at its fastest pace in five months on a year-on-year basis, the report from the Commerce Department on Friday showed.

Though price pressures from tariffs on imports were mild last month, economists continued to expect the duties to drive up inflation in the second half of the year.

They also anticipate that increasing operating costs for businesses because of tariffs will eventually force employers to lay off workers, putting a damper on their spending. Consumers, already cutting back on discretionary spending, would also become more selective because of high prices.

"The data supports a picture of the US economy that is moving in a more stagflationary direction, albeit slowly," said Preston Caldwell, chief US economist at Morningstar. "This presents somewhat of a quandary for the Fed, but we expect them to proceed with two rate cuts this year, given that expectations of rate cuts have been baked into the market for some time, and because of worrying data recently in the labour market."