Why it matters: Fears of a rapidly deteriorating economy may have been premature. Even with a shocking drop in consumers’ feelings about the economy, they continued to spend last month.

But: Inflation rose again–0.4% on the month and 4.3% on annual basis. That means in real terms spending rose 0.4%. PCE inflation is the Fed’s preferred measure of price changes. It has leveled off the last few months, however it remains at an elevated level. The slowing of the rise is good news, but if inflation persists at this level for a long period the Fed will have to address it, likely by raising rates and wringing liquidity out of the financial system.

Be smart: Persistent supply chain issues make deciphering what is happening with prices increasingly difficult. Higher prices because of backed up supply chains are not necessarily because of inflation. Supply and demand suffice as an explanation. However, the longer the backups remain, the more the impact they have on prices looks inflationary and more permanent rather than temporary.

• Income and savings also rose in August. Income rose 0.2%, and wages and salaries rose 0.5%. Business income dropped 1.5% though.
• Savings decreased 6% compared to July, but Americans still socked away $143 billion in August. That is about $40 billion over the pre-pandemic average. Americans continue to build savings to support consumption in the coming months.

Bottom line: This was a surprising report given the delta headwinds in August and fears of a much worse outcome. There are certainly weaknesses in the report, but given what the numbers could have looked like, we’ll take it.

—Curtis Dubay, Senior Economist, U.S. Chamber of Commerce