US consumer spending edges up in May; inflation still high

WASHINGTON (Reuters) – U.S. consumer spending slowed sharply in May, but persistently strong underlying inflation pressures could compel the Federal Reserve to resume raising interest rates next month.

Consumer spending edged up 0.1% last month, the Commerce Department said on Friday. Data for April was revised lower to show spending accelerating 0.6% instead of 0.8% as previously reported. Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of U.S. economic activity, rising 0.2%.

Last month’s small gain implies consumer spending moderated in the second quarter after rising at its fastest pace in nearly two years in the January-March period. Nevertheless, the pace is probably still sufficient to help keep the economy expanding. Strong consumer spending accounted for the economy’s 2.0% annualized growth pace last quarter, defying fears of a recession because of the Fed’s hefty rate hikes.

Upbeat May data including job growth, housing starts and orders for long-lasting manufactured goods have led economists to expect that second-quarter gross domestic product growth would be close to the first-quarter pace. The Atlanta Fed is currently estimating GDP increasing at a 1.8% rate this quarter.

Consumer spending remains underpinned by strong wage gains in a tight labor market. But the outlook is less favorable. Most lower-income households are believed to have depleted savings accumulated during the COVID-19 pandemic.

About 26.6 million Americans with federal student loans will start making interest payments in October when a more than three-year moratorium ends. Morgan Stanley (NYSE:) estimates that the hit to income at the disposal of households could lower inflation-adjusted consumer spending by about 10 basis points this year and slice off seven basis points from GDP growth.

The personal consumption expenditures (PCE) price index gained 0.1% in May after rising 0.4% in April. In the 12 months through May, the PCE price index advanced 3.8% after climbing 4.3% in April.

Excluding the volatile food and energy components, the PCE price index gained 0.3% after rising 0.4% in the prior month. The so-called core PCE price index increased 4.6% on a year-on-year basis in May after advancing 4.7% in April. The Fed tracks the PCE price indexes for its 2% inflation target.

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