By Jason Lange
WASHINGTON (Reuters) - U.S. household spending rose in August as incomes were buoyed by solid wage gains, signs that momentum could be growing in the economy despite months of harsh government austerity.
American families spent 0.3 percent more last month than the month before, which was in line with expectations, Commerce Department data showed on Friday.
Higher wages drove incomes up 0.4 percent, the most since February. Analysts said the increase could drive faster spending in the months ahead.
Rising wages and spending also appeared to give businesses a little more leverage to raise prices, with inflation outside food and energy picking up in August. That could bolster the case for the U.S. Federal Reserve to move forward with winding down a bond-buying stimulus program.
"This acceleration in core inflation will likely be encouraging to the Fed," said Millan Mulraine, an economist at TD Securities in New York.
The data backs the view that tax hikes and federal budget cuts are dragging on the economy less as the year goes on. Washington increased tax rates in January and slashed the federal budget in March.
But Wall Street and the Fed have appeared increasingly concerned that political gridlock in Washington could trigger a government shutdown next week and perhaps a debt default after mid-October, either of which could deliver blows to the economy.
Worries about the future are also rising among families.
U.S. consumer sentiment slid in September to its lowest level in five months as Americans saw higher interest rates and sluggish economic growth ahead, according to the final reading of the Thomson Reuters/University of Michigan's consumer survey.
The data had little impact on sentiment among investors, who remain preoccupied with the potential for fiscal crises. U.S. stocks fell and the dollar closed in on a seven-month low.
SOME BRIGHT SIGNS
The data from last month, however, was modestly upbeat.
Even after taking into account tax bills and price increases, incomes rose in August by the most since March.
"The pick-up in income growth in August suggests that consumption growth may even accelerate in the fourth quarter," said Paul Ashworth, an economist at Capital Economics in Toronto.
Indeed, the recent gains in consumer spending, while still modest, appear to have stopped a worrisome cooling of inflation.
Economists warn that if inflation runs too low an economic shock could tip the economy into a spiral of falling prices and wages.
Core prices, stripping out volatile food and energy prices, rose 0.2 percent in August, up from a 0.1 percent gain in July, according to the Fed's favored gauge.
Analysts pointed out that annualized readings for core inflation over the past few months now appear to be trending higher, suggesting a turning point may have been reached.
Still, annual inflation is lower than it was at the start of the year, according to both headline and core measures. These both came in at 1.2 percent in August, well below the Fed's 2 percent target.
(Reporting by Jason Lange; Additional reporting by Luciana Lopez in New York; Editing by Krista Hughes)