US consumer spending, core inflation slows in May

WASHINGTON (Reuters) – U.S. consumer spending rose less-than-expected in May as auto scarcity continued while high prices forced purchases of other goods, another sign that the rebound in economic growth in the early second quarter was losing steam.

Although the report from the Commerce Department on Thursday indicated that inflation has likely peaked, price pressures remained strong enough to keep the Fed on a path of aggressive monetary policy tightening. However, Fed officials should welcome the slowdown in demand.

Higher interest rates and tight financial conditions are raising fears of a recession, but economic data so far suggests moderate growth. Other data on Thursday showed that new claims for unemployment benefits continued to fall last week, despite layoffs in the technology and housing sectors.

“The Fed has not yet won the war on inflation, but there are somewhat encouraging signs that the economy is slowing,” said Christopher Robke, chief economist at FWDBONDS in New York. “Despite recession fears, layoffs have not reached levels high enough to cause the economy to head over the cliff into the depths of the recession.”

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.2% in May, the smallest rise in five months. Data for April has been revised downward to show an increase in expenses of 0.6% instead of 0.9% as previously reported.

There have also been bearish revisions to data going back to January, which shows weak spending growth this year.

Spending on goods that were supposed to last three years or more fell 3.2%, influenced by cars. Purchases of furniture and household durable equipment, as well as recreational goods and vehicles, also declined. This was partly offset by a 0.7% increase in services, which was driven by housing and utilities as well as healthcare and international travel.

Economists polled by Reuters had expected consumer spending to rise 0.4%. The report included data on home construction, building permits and industrial production in a sign that the economy was struggling to rally after gross domestic product declined at an annualized rate of 1.6% in the first quarter.

Stocks on Wall Street were lower. The dollar settled against a basket of currencies. US Treasury bond prices rose.

Peak inflation

The US central bank this month raised its policy rate by three-quarters of a percentage point, its largest rise since 1994. The Fed has increased its policy rate by 150 basis points since March.

Inflation maintained its upward trend in May. The personal consumption expenditures (PCE) price index rose 0.6% last month after rising 0.2% in April. In the 12 months through May, the PCE price index rose 6.3% after similar gains in April. It was driven by rising prices of goods and services.

But underlying price pressures are beginning to ease. Excluding the volatile food and energy components, the PCE price index rose 0.3% for the fourth consecutive month.

The so-called core PCE price index advanced 4.7% year-on-year in May, the smallest increase since last November, after rising 4.9% in April. PCE price indices are the Fed’s preferred measures of the 2% inflation target.

PCE price indices are lower than the CPI, which rose 8.6% year-over-year in May, because it has less weight for rapidly rising residential rentals. While health care has more weight in PCE measures, legislative cuts to Medicare payments have lowered prices for medical services. They also benefited from lower financial services costs amid falling asset prices.

“June and July data may also show weak PCE relative to the CPI, but we expect the Fed will need to see evidence of easing inflationary pressure across a range of data before slowing the pace of rate hikes,” said Veronica Clark, Economist. At Citigroup in New York.

Inflation-adjusted consumer spending fell 0.4% in May, the first decline since December. That, combined with the strong build-up of inventory in the first quarter, especially in general merchandise stores, poses a downside risk to economic growth in the second quarter. Growth estimates for the quarter range from a low of 0.3% to a high of 2.9%.

But with a tight labor market generating strong wage increases and household savings still plentiful, moderate nominal spending is expected to prevail, bolstered by services. This should help limit job losses.

Wages increased 0.5% in May, which contributed to a 0.5% increase in personal income. The savings rate rose to 5.4%, the first increase this year, from 5.2% in April.

A separate report from the Labor Department showed that initial claims for state unemployment benefits fell by 2,000 to a seasonally adjusted 231,000 for the week ending June 25.

“As the provision of services leads to disproportionately more jobs than the production of goods, the labor market remains tight,” said Bill Adams, chief economist at Bank of Comerica in Dallas. “This eases the crossover of self-reinforcing spending cuts into job cuts, income cuts, and even spending cuts.”

(Reporting by Lucia Mutikani) Editing by Nick Czyminsky and David Gregorio

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