WASHINGTON (Reuters) - U.S. economic growth likely picked up in the second quarter, spurred by solid consumer spending and inventory building, but the pace of expansion should still leave expectations of a September interest rate cut from the Federal Reserve intact.

The Commerce Department's advance report on second-quarter gross domestic product on Thursday is also expected to show inflation slowing considerably last quarter, with sub-3% readings on all measures, welcome news for U.S. central bank officials ahead of their two-day policy meeting next week.

The economy, which continues to outperform its global peers despite hefty rate hikes from the Fed in 2022 and 2023, remains supported by a resilient labor market even as the unemployment rate has risen to a 2-1/2-year high of 4.1%.

"The economic expansion is tracking the Goldilocks outlook, which is slower growth and a lower rate of inflation," said Brian Bethune, an economics professor at Boston College. "Consumer spending is keeping things in motion."

Gross domestic product likely increased at a 2.0% annualized rate last quarter, according to a Reuters survey of economists. It would be just above the 1.8% pace that Fed officials regard as the non-inflationary growth rate. Estimates ranged from a 1.1% rate to a 3.4% pace.

The survey was, however, conducted before Wednesday's advance indicators data, which showed the goods trade deficit narrowing in June and retail and wholesale inventories increasing. The data prompted the Atlanta Fed to trim its second-quarter GDP estimate to a 2.6% rate from a 2.7% pace.

The economy grew at a 1.4% rate in the first quarter. Still, growth would remain considerably slower than the 4.2% pace logged in the second half of last year.

Consumer spending, which accounts for more than two-thirds of the economy, is forecast to have increased at around a 2.0% rate after slowing to a 1.5% pace in the January-March quarter. Much of the increase in spending was in June.

Businesses accumulated more inventory, which economists estimated could add at least a full percentage point to GDP growth, after being a drag for two straight quarters. Despite the anticipated boost from inventories, economists expected growth in domestic demand at around a 2.4% pace.

The anticipated rise in GDP growth bodes well for an acceleration in productivity, which would slow the pace of increase in labor costs and ultimately price pressures. The personal consumption expenditures price index, excluding the volatile food and energy components, is forecast increasing at a 2.7% rate after surging at a 3.7% pace in the first quarter.

The so-called core PCE is one of the inflation measures tracked by the Fed for its 2% target. The government's broadest gauge of prices in the economy, the gross domestic purchases price index, is seen rising at a 2.6% pace after jumping at a 3.1% rate in the January-March quarter.

DRAG FROM TRADE

"Inflation may well turn out to be a bigger story than the actual growth numbers," said Dan North, senior economist at Allianz Trade North America.

The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for the past year.

It has hiked its policy rate by 525 basis points since 2022, and a moderation in inflation, combined with a cooling labor market would boost financial market expectations for three rate cuts this year, starting in September.

Business spending on equipment is forecast to have accelerated after tepid growth in the first quarter. Government spending is also expected to have contributed to growth. But trade likely subtracted from growth as exports softened amid slower global demand and a strong dollar.

Pantheon Macroeconomics estimated that the trade deficit subtracted as much as 1.4 percentage points from GDP growth, which would be the biggest drag in more than two years. The hit on GDP was likely to be more than offset by the rise in inventories. A surge in mortgage rates in the spring probably undermined the housing market recovery.

Residential investment, which includes homebuilding and sales, is expected to have contracted after posting double-digit growth in the first quarter.

Despite the anticipated pick-up in economic growth, the outlook for the second half of the year is hazy. The labor market is slowing, which will impact wage gains.

The saving rate is well below its pre-pandemic average and economists estimate that the bulk of the Fed's rate hikes is still to be felt. State and local government revenues are also slowing, which could erode spending. There are also worries about new tariffs, which could see businesses front-loading imports if former President Donald Trump is returned to the White House in November's presidential election.

Nonetheless, a recession is not expected, with monetary policy easing anticipated this year.

"Changes in corporate borrowing costs for small and medium-sized businesses have historically taken about two years to dampen GDP growth, suggesting the bulk of the impact of the Fed's hiking cycle, which ended only 12 months ago, lies ahead," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "We expect growth in GDP to slow to a 1.0% to 1.5% range in the second half."