US retail sales unexpectedly rose in August as lower fuel prices supported spending, but demand is cooling as the Federal Reserve aggressively raises interest rates.

Retail sales increased 0.3% last month, the Commerce Department said on Thursday. Data for July was revised down to show retail sales falling 0.4% instead of being unchanged as previously reported.

Economists polled by Reuters had forecast sales would be unchanged, with estimates ranging from as low as a 0.5% decline to as high as a 0.5% increase.

The report was another sign that the economy could tolerate higher interest rates as the Fed tightens monetary policy to fight stubbornly high inflation. Retail sales are being supported by a tight labor market, which is generating strong wage growth.

The report followed news on Tuesday of a surprise increase in monthly consumer prices in August, which cemented expectations for a third 75-basis-point rate hike by the U.S. central bank next Wednesday.

The national average gasoline price dropped to about $3.82 per gallon in late August after hitting an all-time high just above $5.00 in mid-June, according to data from AAA. Prices at the pump were averaging $3.698 per gallon on Thursday.

Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged last month. Data for July was revised lower to show these so-called core retail sales increasing 0.4% instead of 0.8% as previously reported.

Core retail sales correspond most closely with the consumer spending component of gross domestic product. A steady pace of consumer spending and strong export growth helped to limit the drag on the economy from a moderation in the pace of inventory accumulation in the second quarter.

Gross domestic product contracted at a 0.6% annualized rate last quarter after declining at a 1.6% pace in the January-March quarter. The economy is not in recession, with the income side of the growth ledger showing a 1.4% rate of expansion in the second quarter, thanks to labor market resilience.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 5,000 to a seasonally adjusted 213,000 for the week ended September 10.

Despite the hand wringing about a possible recession next year due to higher borrowing costs, there has not been a surge in layoffs. Economists say companies are hoarding workers after experiencing difficulties hiring in the past year as the Covid-19 pandemic forced some people out of the workforce in part because of prolonged illness caused by the virus.

There were 11.2 million job openings at the end of July, with two jobs for every unemployed person.