WASHINGTON – Consumer spending rose by a solid 0.4 percent in June, while a key gauge of inflation increased at an annual pace of 2.2 percent for a second straight month — the strongest back-to-back gains in six years.
The gain in spending followed an even better 0.5 percent rise in May, which was revised from a 0.2 percent initial estimate, the Commerce Department reported Tuesday. Incomes rose a solid 0.4 percent in June, matching the May increase.
Inflation over the past four months has been at 2 percent or slightly above 2 percent, which is the target the Federal Reserve seeks to achieve for price gains.
The central bank has been raising interest rates to make sure that inflation pressures, which have been low since the last recession, don't get out of hand. Fed officials have said they are willing to allow inflation to rise at levels slightly higher than its target for a time, given that inflation failed undershot that level for six years.
The Fed raised rates three times last year and has hiked rates twice so far this year. Analysts don't expect another rate hike at this week's Fed meeting but are forecasting hikes in September and probably December. President Donald Trump has criticized the Fed's recent rate hikes, warning they could dampen strong economic growth.
The economy grew at a 4.1 percent annual rate in the April-June quarter, the fastest pace in nearly four years, and nearly double the 2.2 percent gain seen in the first quarter. Much of the boost came from a rebound in consumer spending as consumers began to spend the extra income they received from the $1.5 trillion tax cut Trump pushed through Congress in December.
Consumer spending, which accounts for 70 percent of economic activity, grew at an annual rate of 4 percent in the April-June quarter after a lackluster gain of just 0.5 percent in the first quarter.
The Trump administration is counting on strong growth to continue in coming quarters, but analysts caution that the 4.1 percent growth spurt in the spring reflected temporary gains. However, they believe there is enough momentum to keep the economy growing at a solid 3 percent rate in the second half of this year.
The saving rate stood at 6.8 percent in June. The May level also stood at 6.8 percent, though that figure was more than double the previous estimate of a saving rate of 3.2 percent.
The big upward revision reflected the annual benchmarking of the data, which pushed saving higher because of an IRS report that found billions of dollars in unreported income. That finding caused the government to sharply boost its previous estimates of the saving rate.