WASHINGTON (Reuters) -U.S. consumer spending increased slightly more than expected in August as households went on vacation and dined out, keeping the economy on solid ground as the third quarter progressed, while inflation continued to steadily pick up.

The report from the Commerce Department on Friday suggested the economy has so far retained most of its momentum from the April-June quarter. Signs of the economy's resilience evident in other data this week showing low layoffs and strong demand by businesses for equipment would argue against the Federal Reserve cutting interest rates again this year after the U.S. central bank resumed policy easing last week.

But the hiring side of the labor market is struggling, with job growth almost stalling in the last three months amid a lingering drag from trade policy uncertainty as well as an immigration crackdown that has reduced the supply of workers. 

"There is no support in this report for (Fed Governor) Stephen Miran's suggestions that policy interest rates have to be cut right away, and by a lot," said Carl Weinberg, chief economist at High Frequency Economics. "Indeed, there is no recommendation in these numbers for any easing of monetary conditions at all."

Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.6% last month after an unrevised 0.5% advance in July, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending increasing 0.5%.

Spending was boosted by outlays on services like transportation, which includes airline travel. Consumers frequented restaurants and bars, and also stayed at hotels and motels. They raised spending on recreation services. 

Outlays on financial services and insurance rose as did those on healthcare, housing and utilities. Spending on services advanced 0.5%, matching July's gain. 

Households also bought recreational goods and vehicles, clothing and footwear, and spent more on gasoline and other energy goods as well as food and beverages. Goods outlays shot up 0.8% after rising 0.6% in July.

Spending has marched ahead despite the significant slowdown in the labor market. Consumption is being driven by high-income households as a robust stock market and still-elevated home prices boost their wealth. Fed data this month showed household wealth jumped to a record $176.3 trillion in the second quarter.

Benchmark revisions to the national accounts data showed stronger income growth in 2024 and in some months this year than previously estimated, which economists said was tied to equities and house prices, and accrued by higher-income households.

Consumers also saved more than had been previously reported, with the saving rate hitting 5.7% in April.

But lower-income households are struggling, and bearing a large share of the burden from higher prices on goods from President Donald Trump's import tariffs. More pain lies ahead when cuts to the federal government's Supplemental Nutrition Assistance Program, commonly known as food stamps, take effect.

"America's 'haves' have done much better than previously understood in recent years," said Bill Adams, chief economist at Comerica Bank. "Revisions to categories of incomes that go to the 'have nots' were much smaller."

The Fed last week cut its benchmark overnight interest rate by 25 basis points to the 4.00%-4.25% range. Financial markets continued to expect two more rate reductions this year. Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury yields were mostly flat.

ECONOMISTS EXPECT SPENDING WILL SLOW

Personal income rose 0.4% in August after a similar gain in July. A 0.6% increase in government transfers, mostly Social Security benefits, accounted for much of the rise in income. Wages gained only 0.3%, in line with a softening labor market, resulting in consumers tapping their saving to fund spending.

The saving rate fell to an eight-month low of 4.6% from 4.8% in July. Strong consumer spending contributed to gross domestic product growing at a 3.8% annualized rate in the second quarter.

The Atlanta Fed upgraded its third-quarter GDP growth estimate to a 3.9% rate from a 3.3% pace earlier.

Economists expected spending to slow by the end of the year, undercut by higher prices, and anticipated that labor market sluggishness would encourage precautionary saving.

Though there has not been a broad rise in inflation, there has been a surge in prices of some goods exposed to tariffs. Businesses have been selling inventory accumulated before the tariffs kicked in, preventing inflation from spiraling.

Producers have also been absorbing some of the duties. Economists, however, do not expect this trend to continue indefinitely and expect businesses will at some point pass on the tariffs to consumers on a wider scale. Inventories were drawn down in the second quarter. 

Trump on Friday announced new tariffs, including a 100% duty on branded medication and 25% levy on heavy-duty trucks.

The Personal Consumption Expenditures (PCE) Price Index increased 0.3% in August after gaining 0.2% in July, the BEA said. PCE inflation was lifted by a 0.3% rise in services, reflecting airline fares, hotel and motel rooms as well as financial services and insurance, housing and utilities.

Goods prices edged up 0.1% as a 1.7% decline in the cost of recreational goods and vehicles offset more expensive other long-lasting manufactured goods and gasoline.

In the 12 months through August, the PCE Price Index advanced 2.7%. That was the biggest year-on-year increase since February and followed a 2.6% rise in July.

Excluding the volatile food and energy components, the PCE Price Index rose 0.2% last month after increasing 0.2% in July.

In the 12 months through August, the so-called core inflation index increased 2.9% after rising 2.9% in July. The Fed tracks the PCE price measures for its 2% inflation target.

"The delayed implementation of tariffs and behavioral shifts that led businesses to stock up inventory suggest the consumer inflation impact has not yet been fully realized," said Shannon Grein, an economist at Wells Fargo.

"Still-high uncertainty, rising prices and sour jobs market sentiment are a worrying mix for spending."