U.S. consumer spending climbed 0.5% in July, the strongest in four months, while services inflation picked up. Economists expect the Fed to cut rates in September despite labor market concerns.

U.S. consumer spending increased by the most in four months in July while services inflation gained pace, but economists said the signs of strong domestic demand were unlikely to prevent the Federal Reserve from cutting interest rates next month amid a softening labor market.

The Commerce Department report on Friday showed spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after an upwardly revised 0.4% gain in June. Motor vehicle purchases led the increase, alongside higher outlays on recreational goods, clothing, footwear, and household equipment.

CBI News reports that spending on services climbed 0.4%, supported by healthcare, housing and utilities, as well as financial services. But restaurant, bar, and hotel expenditures declined.

The core personal consumption expenditures (PCE) price index – the Fed’s preferred inflation gauge – rose 0.3% in July and 2.9% year-on-year. Economists pointed to “sticky service sector inflation,” but still expect a 25-basis-point rate cut when the Fed meets on Sept. 16–17.

The labour market remains under pressure. Employment gains have averaged 35,000 per month over the past three months, compared to 123,000 in the same period last year. A Conference Board survey this week found more Americans view jobs as “hard to get,” the highest level in four and a half years.

Fed Chair Jerome Powell last week signaled readiness to ease rates in September, citing rising labour market risks while acknowledging inflation concerns.