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U.S. consumer spending misses expectation in July; inflation slows

WASHINGTON (Reuters) - U.S. consumer spending barely rose in July, but inflation eased considerably, which could give the Federal Reserve room to scale back its aggressive interest rate increases.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1% last month, the Commerce Department said on Friday. Data for June was revised slightly down to show outlays advancing 1.0% instead of 1.1% as previously reported.

Economists polled by Reuters had forecast consumer spending would gain 0.4%.

The national average gasoline price dropped to about $4.27 per gallon in the last week of July after hitting an all-time high just above $5 in mid-June, according to data from motorist advocacy group AAA. That likely freed money for spending elsewhere.

Prices of apparel and services like air travel, hotel and motel accommodation also declined in July, curbing inflation.

A moderate pace of consumer spending in the second quarter helped to blunt the drag on the economy from a sharp slowdown in inventory accumulation caused by supply chain bottlenecks. Gross domestic product contracted at a 0.6% annualized rate last quarter after shrinking at a 1.6% pace in the first quarter.

The economy is, however, not in a recession. When measured from the income side, the economy grew at a 1.4% pace, slowing from the January-March quarter's 1.8% rate, the government reported on Thursday.

Risks of a downturn remain as the Federal Reserve aggressively tightens monetary policy to control inflation. There is, however, cautious optimism that the U.S. central bank could slow the pace of its rate hikes if inflation continues to moderate.

The personal consumption expenditures (PCE) price index dipped 0.1% last month after surging 1.0% in June. In the 12 months through July, the PCE price index increased 6.3%. The PCE price index shot up 6.8% on a year-on-year basis in June.

Excluding the volatile food and energy components, the PCE price index gained 0.1% after racing 0.6% in June. The so-called core PCE price index increased 4.6% on a year-on-year basis in July after rising 4.8% in June.

Fed officials are closely watching the PCE price indexes, in addition to the consumer price index. Though oil prices have dropped significantly, rental costs have remained hot, leaving some economists hesitant to declare that inflation has peaked.

Fed Chair Jerome Powell's address on Friday at the annual Jackson Hole global central banking conference in Wyoming could shed more light on how much further U.S. borrowing costs need to rise.

(Reporting by Lucia Mutikani; Editing by Paul Simao and Nick Zieminski)
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