- Consumer spending growth slowed sharply in May, The personal consumption expenditures (PCE) price index rose 6.3 percent.
- May’s drop in spending on big-ticket manufactured items reflects a slowing in vehicle sales.
- Consumer spending on services rose 0.7 percent in the month, the same as in April.
A key US inflation indicator showed that price increases remained stable in the 12 months ending in May, while consumer spending growth slowed sharply, a positive sign in the fight against rising prices.
Any sign of moderation will be welcomed by President Joe Biden, whose approval ratings have plummeted as his administration has struggled to find effective tools to assist American families suffering from rising gasoline, food, and housing prices.
The trend also offers comfort to the Federal Reserve, showing its aggressive interest rate strategy is starting to have an impact to quell the fastest surge in inflation in more than 40 years.
The personal consumption expenditures (PCE) price index rose 6.3 percent compared to May 2021, still high but the same pace as in the prior month, the Commerce Department reported Thursday.
The index jumped 0.6 percent compared to April, much faster than in the prior month, but slightly below what economists had projected.
But spending edged up just 0.2 percent, less than half the increase in April and part of a steady downward drift as consumers pull back amid surging prices.
Buoyed by a stockpile of savings, helped by massive government aid, consumers have been the lynchpin in the rapid US recovery from the pandemic downturn.
But strong demand clashed with global supply chain snarls and the world’s largest economy has been battered for months by a cresting inflation wave, made more painful by the surge in energy prices sparked by the Russian invasion of Ukraine in late February.
Excluding volatile food and energy prices, “core” PCE rose 0.3 percent in the month, the same as in April, while the 12-month pace slowed slightly to 4.7 percent, the report said.
Brian Deese, head of the White House National Economic Council, noted that the three-month annual average for core PCE fell to four percent from 5.2 percent.
“That is important moderation that we’re seeing,” he said on CNBC.
However, he said the headline continues to be driven by higher energy prices.
Energy prices jumped four percent in the month, after dropping in April, and are 35.8 percent higher than May 2021, the data showed.
The PCE price index is the Federal Reserve’s preferred inflation gauge, as it reflects consumers’ actual spending, including shifts to lower cost items, unlike the more well-known consumer price index, which jumped 8.6 percent in May.
PCE also gives less weight to things like rent, vehicles and airline fares, which have contributed to the blistering pace of the CPI rise.
The Fed early this month announced the biggest hike in the benchmark lending rate in nearly 30 years, a three-quarter point increase that was the third step in its counteroffensive against rising inflation, as it aims to cool demand.
Policymakers have signaled there is a good chance of another similar increase in late July, followed by more big steps in coming months.
That has raised concerns the Fed could push the economy into a recession — a price Fed Chair Jerome Powell signaled the central bank is willing to pay to control inflation.
The signs of consumers pulling back will weigh on second-quarter GDP growth, after the Commerce Department revised first-quarter consumer spending sharply lower, cutting it to 1.8 percent from 3.1 percent, as the economy contracted 1.6 percent.
According to Grant Thornton’s Diane Swonk, “consumers have drained approximately $600 billion of the excess $2.5 trillion in savings they amassed during the pandemic to deal with the bite of higher prices.”
The sharp drop in spending on big-ticket manufactured items, which economists note reflects a slowing in vehicle sales, was the main driver of May’s slower consumption growth.
Spending on services rose 0.7 percent in the month, the same as in April.
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