US: Prices rise less than expected as consumer spending cools

Inflation-adjusted consumer spending fell for the first time this year in May as persistent price pressures weighed on household budgets. Purchases of goods and services, adjusted for changes in prices, fell 0.4% in May after a downwardly revised 0.3% gain a month ago. Spending on services increased while spending on goods decreased. The personal consumption expenditures price index, which the Fed uses for its inflation target, increased by 0.6% month-on-month and has increased by 6.3% since May 2021. The core PCE price index rose 0.3%, less than expected. It increased 4.7% from a year ago, the lowest increase since November. The monthly rate will remain below the CPI in May and June as rapidly rising gasoline prices and rents weigh less on the PCE index.

If we look at the sub-items; Non-inflation-adjusted spending rose 0.2% month-on-month, while personal income rose 0.5%. With pandemic support largely resolved, income growth is increasingly being associated with labor market health. Americans slashed their spending on goods excluding essentials like food and energy products in May, leading to the first monthly decline (-0.3%) in retail sales this year. In May, the savings rate rose to 5.4% from the previous 5.2%, indicating that growth in spending will slow. Still, rising wages and consumer credit will support growth this year.

The slowdown in consumer spending, the main driver of the US economy, is adding to growing concerns about the economic outlook. Household sentiment is at record low, recession fears are rising, and the labor market, though still strong, is showing some early signs of softening. Flexible demand for services reveals the change in consumer preferences from goods to services. However, the report reflected the flexible demand for services, highlighting a long-awaited shift in consumer preferences from goods to services. The distribution of spending between goods and services, as well as between discretionary purchases and basic needs, also reveals the short-term consumer outlook. The share of basic necessities such as food and gasoline in the consumer basket has risen sharply recently as inflation forces Americans to spend more on necessities.

Inflation is eroding Americans’ incomes and households are facing rising prices across the economy, including near-record gasoline costs. The Fed, which raised interest rates the most since 1994 earlier this month, will consider the latest figures at its July meeting when deciding whether to raise rates again by 75 basis points or 50 basis points. Powell said they “hope growth remains positive” and said the economy is “well positioned to withstand tighter monetary policy”. But he also acknowledged that the task of avoiding a recession has become more difficult in recent months. While interest rate increases reduce inflation, it is inevitable that the economy will slow down and unemployment will increase. Although the Fed wants to do this without putting the economy into recession or stagflation, there are concerns that such a risk may be triggered by the excessively rapid rate hikes.

In terms of the Fed; It’s been two weeks since the 75 basis point rate hike, but the factors driving the move – higher energy prices and inflation expectations – have sharply reversed. The Fed may be too quick to react to developments that point to upward inflationary pressures. This runs the risk of over-tightening monetary policy. These developments, on the other hand, support the FOMC’s decision to lower the interest rates, which were expected to increase by 75 basis points, to 50 basis points in July.

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