WASHINGTON (Reuters) – U.S. consumer spending rebounded in August, but aggressive interest rate hikes from the Federal Reserve as it battles stubbornly high inflation are slowing demand, which could limit an anticipated rebound in economic activity this quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4% last month after falling 0.2% in July, the Commerce Department said on Friday. Economists polled by Reuters had forecast consumer spending rising 0.2%.

Households got a reprieve from a drop in gasoline prices, freeing up cash to spend on goods, travel and dining out.

Gasoline prices dropped 11.8% to $3.691 per gallon in August from July, according to data from the U.S. Energy Information Administration. Still, inflation picked up last month.

The personal consumption expenditures (PCE) price index rose 0.3% last month after dipping 0.1% in July. In the 12 months through August, the PCE price index increased 6.2% after advancing 6.4% in July.

Excluding the volatile food and energy components, the PCE price index jumped 0.6% after being unchanged in July. The so-called core PCE price index climbed 4.9% on a year-on-year basis in August after increasing 4.7% in July.

The Fed tracks the PCE price indexes for its 2% inflation target. Other inflation measures are running much higher. The consumer price index increased 8.3% year-on-year in August.

The U.S. central bank last week raised its policy interest rate by 75 basis points, its third straight increase of that size, and signaled more large increases to come this year. Since March, the Fed has hiked its policy rate from near zero to the current range of 3.00% to 3.25%.

The Fed raised its median forecast for core PCE inflation to 4.5% this year from its previous estimate of 4.3% in June. Its estimate for core inflation in 2023 was boosted to 3.1% from the previously projected 2.7% in June.

Inflation adjusted consumer spending barely rose in August. That suggests consumer spending could be tepid this quarter after helping to blunt the drag on gross domestic product from a slow down in the pace of inventory accumulation in the second quarter.

The economy contracted at a 0.6% annualized rate last quarter after shrinking at a 1.6% pace in the January-March quarter. Growth estimates for the third quarter are as high as a 2.1% rate, driven largely by a narrowing deficit. An accumulation of inventory, part of it unsold goods because of slowing demand, is also seen support GDP growth this quarter.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)