US consumer spending unexpectedly fell in July as savings rose to their highest level in more than 1.5 years, indicating that households remain cautious despite an acceleration in economic growth.

The Commerce Department said on Friday consumer spending dipped 0.1 per cent last month, the first decline since January, after an unrevised 0.4 per cent gain in June.

Economists had expected consumer spending, which accounts for more than two-thirds of economic activity, to increase 0.2 per cent in July. When adjusted for inflation, it slipped 0.2 per cent after gaining 0.2 per cent in June.

The weakness in consumer spending at the start of the third quarter will probably do little to change perceptions that the economy has retained much of its second-quarter momentum.

Other sectors of the economy such as housing, business spending, exports and government activity are accelerating. In addition, labour market conditions are strengthening.

The dollar fell against a basket of currencies after the data. US stock index futures were trading higher.

The government reported on Thursday that the economy expanded at a 4.2 per cent annual pace in the second quarter, with consumer spending growing at a 2.5 per cent pace.

Third-quarter growth estimates currently range as high as a 3.6 per cent rate.

Savings increased to $739.1 billion in July, the highest level since December 2012, from $709.4 billion in June. At 5.7 per cent, the saving rate was also the highest since December 2012. The increase in savings came even as income posted its smallest increase since December.

While rising savings bode well for future spending, confidence among households will probably need to increase significantly for spending to pick up.

With consumption weak, inflation pressures were muted in July, giving the Federal Reserve room to keep its benchmark overnight lending rate near zero for some time while it awaits an acceleration in wage growth.

A price index for consumer spending edged up 0.1 per cent after increasing 0.2 per cent in June. That was the smallest rise since February. In the 12 months through July, the personal consumption expenditures (PCE) price index rose 1.6 per cent. It also increased by 1.6 per cent in June.

Excluding food and energy, prices inched up 0.1 per cent after rising by the same margin in June.

The so-called core PCE, which is the Fed’s favorite inflation measure, increased 1.5 per cent in the 12 months through July, continuing to run below the central bank’s 2 per cent target. It had advanced 1.5 per cent in June.

Last month, income increased 0.2 per cent after rising 0.5 per cent in June. Income at the disposal of households after adjusting for inflation and taxes nudged up 0.1 per cent after increasing 0.3 per cent in June.

Reuters