Consumer Spending Rises By Most in Six Months; Inflation Higher Too

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Consumers boosted their spending in July by the largest amount in six months, offering hope that the current economic slowdown may not be as severe as some had feared.

The Commerce Department reported that spending rose by a healthy 0.8 percent last month, double the 0.4 percent gain in June. Incomes also were up, rising by 0.5 percent in July, reflecting stronger wage growth.

A gauge of inflation tied to spending showed that consumer prices, excluding energy and food, have risen by 2.4 percent over the past 12 months, the fastest rate of increase in nearly four years.

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That increase in inflation is above the Federal Reserve's comfort level for annual price gains of 1 percent to 2 percent and illustrates the competing forces the central bank is currently facing.

The Fed wants to slow the economy enough to keep inflation under control but not overdo the credit tightening and push the economy into a recession.

In minutes of its August meeting released this week, the Fed described its decision to pause in its rate hikes as a "close call." Some economists believe the Fed will remain on hold at its September meeting but other analysts argue that further rate increases will be needed because inflation will remain at unacceptably high levels.

The 2.4 percent rise in consumer prices excluding food and energy for the 12 months ending in July matched a similar increase in September 2004 with that pace not exceeded since a 2.5 percent 12-month rise in August 1995.

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