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Consumer spending was strong in August while inflation remained elevated

<i>LM Otero/AP via CNN Newsource</i><br/>Shoppers look at school supplies at a Walmart in Dallas on August 12.
<i>LM Otero/AP via CNN Newsource</i><br/>Shoppers look at school supplies at a Walmart in Dallas on August 12.

By Alicia Wallace, CNN

(CNN) — Americans ramped up their spending in August; however, their costs of living were on the rise as food and other goods became even more expensive last month and services prices remained stubbornly high.

New economic data released Friday showed that consumer spending rose 0.6% in the key back-to-school shopping month of August, and 0.4% when adjusting for inflation. That’s further indication that a critical driver of the US economy continues to chug along despite broader uncertainty and a slowdown in the labor market.

Still, some prices — including those exposed to steep tariffs imposed by President Donald Trump — are rising faster than they have in months, according to Commerce Department data released Friday.

The Personal Consumption Expenditures price index — the inflation gauge the Federal Reserve uses for its 2% target rate — rose 0.3% on a monthly basis (versus a 0.2% increase in July), which lifted the annual rate to 2.7% from 2.6%, and hitting a six-month high.

Energy and gas prices rose in August, and that was a big driver of the monthly increase; however, food prices shot higher as well. Those were up 0.5%, the highest monthly gain since March, and are now up 2.2% from last year.

When excluding food and energy, categories that can be quite volatile, a closely watched gauge of underlying inflation held steady in August. The core PCE price index rose 0.2% in August, the same pace as July, and was unchanged at 2.9%.

Friday’s data showed that inflation remains well above the Fed’s 2% target.

“Inflation dynamics inside the August PCE report illustrated stubborn service sector inflation that increased from 3.5% to 3.6%, while one can clearly observe rising good prices inside the index with a year ago increase of 13.9% in beef and veal costs along with a 7% increase in household utility costs as well as a 6.2% increase in the cost of electricity all on a year ago basis,” Joe Brusuelas, chief economist at RSM US, wrote in a note Friday.

Economists were expecting inflation to rise 0.3% from July and to increase to 2.7% annually.

Stocks moved higher on the news. The Dow rose by 200 points, or 0.44%. The S&P 500 gained 0.2% and the Nasdaq Composite rose 0.03%.

A ‘K-shaped economy’ at play

For the August spending spree, Americans appeared to dip into their savings. Friday’s report showed that the saving rate dropped to 4.6% from 4.8% in July.

Part of that was because spending gains outpaced income growth for the month. Personal income was up 0.4% and just 0.1%, when accounting for inflation.

Still, although the spending trajectory appears strong on the aggregate, the US economy is being increasingly powered by the few: Through the second quarter of this year, the top 20% of earners accounted for roughly half of all spending, Moody’s Analytics data has shown.

This “K-shaped” environment, economists warn, makes the US economy increasingly vulnerable to shocks.

“While we are encouraged by the 0.4% increase in income growth, the fact that Americans had to draw down savings to support the current pace of spending is a not-so-friendly remainder that the pace of spending is likely driven by upper-end households while lower-income cohorts remain stressed,” Brusuelas wrote.

This story is developing and will be updated.

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