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Drop in U.S. consumer spending clouds Fed rate hike outlook

WASHINGTON -- U.S. consumer spending unexpectedly fell in August for the first time in seven months while inflation showed signs of accelerating, mixed signals that could keep the Federal Reserve cautious about raising interest rates. The Commerc...

WASHINGTON - U.S. consumer spending unexpectedly fell in August for the first time in seven months while inflation showed signs of accelerating, mixed signals that could keep the Federal Reserve cautious about raising interest rates.

The Commerce Department said on Friday, Sept. 30, that consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.1 percent last month after accounting for inflation.

Analysts polled by Reuters had expected a 0.1 percent gain.

Yields on U.S. government debt fell after the data and the dollar weakened against a basket of currencies, signaling investor doubts about the prospect of a near-term Fed rate increase. U.S. stock futures trimmed gains.

Fed Chair Janet Yellen said last week she expected the U.S. central bank would raise rates once this year to keep the economy from eventually overheating.

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Prices for fed funds futures suggest investors see almost no chance of a hike at the Fed's next policy meeting in early November and roughly even odds of an increase at its mid-December meeting, according to CME Group.

Consumer spending, which has been robust in recent months, partially offset the drag from weak business investment and falling inventories in the second quarter when the economy expanded at a lackluster 1.4 percent annual rate.

While overall economic growth could still accelerate in the current quarter even with August's slight decline in consumer spending, households appear to be spending with less gusto than in prior months.

Consumer spending has been driven by a tightening labor market, which Yellen said this week might be lifting incomes.

Personal income rose 0.2 percent in August, in line with expectations.

Consumer prices also rose about as much expected in August, with the price index excluding food and energy increasing 0.2 percent from the prior month. That left inflation excluding food and energy at 1.7 percent in the 12 months through August, up a tenth of a percentage point from the prior month and closer to the Fed's 2 percent inflation target.

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