Americans increased their spending in October at the fastest rate in three months even though income growth was essentially flat, its weakest showing in 13 months.
The Commerce Department said Wednesday that consumer spending rose 0.3% last month, the best gain since a 0.5% rise in July.
An inflation gauge that is tied to spending edged up a modest 0.2% and is just 1.3% higher over the past 12 months, well below the Federal Reserve’s 2% annual target level for inflation.
The October spending increase adds to evidence that consumers will likely do their part this quarter to offset a drag from businesses cutting back on investment plans because of the ongoing U.S.-China trade war. The holiday shopping season is expected to be a solid one: The National Retail Federation has forecast that holiday sales will rise between 3.8% and 4.2%, a sharp increase from last year.
During the July-September quarter, consumer spending, which accounts for about 70% of the economy, grew at a solid 2.9% annual pace. It was a key reason why the economy was able to withstand the effects of weak business investment related to the trade war. Overall growth, as measured by the gross domestic product, amounted to a 2.1% rate last quarter, the government said Wednesday, slightly lower than the 2% annual gain in the previous quarter.
Last month’s 0.3% annual increase in consumer spending reflected gains in sales of nondurable goods such as food, clothing and services, which offset a big drop in the sale of durable goods such as autos.
The flat reading for incomes reflected a sharp 1% drop in a category that measures business owners’ income. At the same time, the important category of wages and salaries showed a solid increase of 0.4%.
The 1.3% gain in inflation over the past 12 months will provide further evidence to the Fed that there is little need to raise interest rates. The Fed raised rates four times last year but has cut them three times this year in response to a slowing economy and threats resulting from the trade war.
The personal saving rate edged down to 7.8% in October, a slight dip from 8.1% in September.