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U.S. consumer spending stalled in July as inflation and Delta variant surged

July inflation index beats economists' projections
July inflation index beats economists' projections 06:48

Growth in U.S. consumer spending slowed in July to a modest increase of 0.3%, a sign many Americans are growing more cautious as COVID-19 cases surge.

The July increase in spending was down sharply from a 1.1% rise in June, the Commerce Department reported Friday. Experts said the pullback suggests the Delta variant of the coronavirus is crimping consumer spending, the driving force in the economy.

"The Delta variant is the most obvious downside risk to the economic outlook in the second half of 2021," PNC Senior Economist Bill Adams said in a research note.

The report also shows that consumer prices over the past 12 months have risen 4.2% — the biggest 12-month gain since a 4.5% increase for the 12 months ending in January 1991.

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Incomes, which provide the fuel for future spending, rose a solid 1.1% in July reflecting in part the strong job gains seen that month.

"The stronger-than-expected 1.1% rise in personal income largely reflected the initial payments from the expanded Child Care Tax Credit in July which boosted federal transfers," economists at Oxford Economics said in a research note.

The IRS sent out $15 billion in CTC checks on July 15. Eligible families with children under 6 will get $300 per child, while families with children ages 6 to 17 will receive $250. The IRS has said about 36 million households are in line to receive the payments, which will be sent each month until they end in December.

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The government reported Thursday that the overall economy as measured by the gross domestic product, rose by a solid 6.6% in the April-June quarter.

Consumer spending on transportation — primarily cars — and restaurants strengthened in July, "a sign of resilience (for now) to the Delta wave," according to economists at Oxford Economics. 

Airlines however, continue to take a beating from the ongoing pandemic. The Transportation Security Administration reported its lowest air travel numbers of the summer on Tuesday and Wednesday after hitting its highest traffic of the year at the beginning of August. A survey by found that 87% of Americans with plans to travel Labor Day weekend, said they would drive, versus 14% of respondents who said they intend to fly.

"The latest virus wave and rising inflation have already taken a major bite out of consumer confidence in August and now we know that spending virtually stalled in July," said Sal Guatieri, senior economist at BMO Capital Markets.

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