(Bloomberg) -- A key gauge of US inflation picked up steam in August, while consumer spending ticked up, suggesting resilience among American households in the face of rising prices across the economy.

The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, rose 0.3% from a month earlier, topping estimates. From a year ago, the gauge was up 6.2%, also higher than forecast and well above the central bank’s 2% goal.

Excluding food and energy, the price index rose 0.6% in the month and was up 4.9% from August 2021, Commerce Department data showed Friday. Both marked an acceleration in inflation from a month earlier and exceeded economists’ expectations.

US Treasuries advanced, while stocks fluctuated at the opening of trading Friday.

Like the Labor Department’s consumer price index earlier this month, the latest figures underscore the breadth and depth of the Fed’s inflation problem. Last week, the central bank raised interest rates by a historically large 75 basis points yet again, and indicated a more aggressive path of tightening for the months ahead than previously thought. 

Purchases of goods and services, adjusted for changes in prices, increased 0.1% last month after a 0.1% decline in July. Helped by a pullback in gasoline prices and underpinned by sustained wage gains and a strong labor market, Americans ramped up spending on services.

The durability of consumer demand has been a key source of support for the economy, but it’s also contributed to persistent price pressures. 

Increased Borrowing

How long Americans can continue to spend at such a pace isn’t clear. Consumer debt, including credit cards, is at an all-time high for the bottom 90% of US households. The Commerce Department’s report showed the saving rate held at a historically low 3.5%. 

Meantime, the central bank’s rapid rate hikes are set to slow the economy and weaken the key source of spending power: the labor market.

What Bloomberg Economics Says...

“The Fed will likely press forward with a stiff sequence of rate hikes given unacceptably high inflation readings, even if it means hiking into a slowing economy... The revised real spending trajectory raises downside risks for 3Q GDP growth.”

-- Andrew Husby and Eliza Winger, economists

For the full note, click here

The latest report on gross domestic product showed upward revisions to the PCE price index and core measure for the first and second quarters. It also showed a clear slowdown in economic activity in the first half of the year, and a sizable downward revision to real disposable incomes.

Personal income, unadjusted for inflation, rose 0.3% for a second month. Growth in wages and salaries decelerated, rising 0.3% in August, the smallest advance since the start of the year. That’s a welcome sign for the Fed as it seeks to cool the pace of wage growth.

Fed Chair Jerome Powell last week reiterated the central bank’s commitment to restoring price stability and indicated the American public will have to endure some pain to return inflation back to target. One of the key things policy makers are looking for is more balance in labor demand and supply that would help ease pressure on wage growth, he said.

The latest data showed that inflation-adjusted spending on goods declined for a second month, while outlays on services increased 0.2%. The report underscores an ongoing shift in consumption patterns, with Americans allocating more of their discretionary income toward services and away from goods. Unadjusted for inflation, spending rose 0.4% after falling in the prior month.

A separate report Friday showed US long-term inflation expectations continued to ease in September, helping boost sentiment, though buying conditions for durable goods like cars and appliances remained near an all-time low.

CarMax Inc.’s latest quarterly results are a glaring example of the mounting headwinds many companies are facing. The used-car dealer on Thursday said the ability of potential buyers to afford vehicles has become challenging against a backdrop of rising borrowing costs, broad and persistent inflation, and the shift in spending preferences.

The CPI, which typically runs hotter than the PCE price index, accelerated in August in a broad-based gain. On a year-over-year basis, CPI was up 8.3% in August. While Powell has said that the PCE price index is a better gauge of inflation, both measures are watched closely by policy makers. 

(Updates with market open, adds University of Michigan data)

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