Consumer spending slowed and the Federal Reserve’s recommended inflation gauge remained moderate in May, the latest sign that the cooldown policymakers have been hoping for is coming to fruition. (albeit more stagnant than some would like).
U.S. consumer spending rose just 0.1% month-on-month in May, according to the Department of Commerce said on friday. This was down from 0.6% growth in April, which itself was lower than previously reported. Adjusted for inflation, spending was flat in May.
Slowing consumption may sound like bad news. After all, consumption is the engine of economic growth in America. But Fed officials have been raising interest rates to curb consumer and business demand, and hope that weak demand will force companies to stop raising prices soon. That could bring inflation back to normal after more than two years of rapid inflation.
So far, inflation has moderated, but remains more stubborn than Fed officials would like. Overall inflation fell to 3.8% in the year to May, falling below 4% for the first time since early 2021, according to a report on Friday. But the ‘core’ anti-inflation measure was to get rid of the frequently fluctuating food and fuel costs. remained at a high level. Officials are closely monitoring the metric to get a sense of how fast prices will rise in the coming months and years.
The core inflation rate in May was 4.6%, lower than economists’ forecast of 4.7%, but has remained at that pace since December 2022.
“This is progress,” said Omail Sharif, founder of Inflation Insights, of the report as a whole. “But the situation is still too high.”
Moderate inflation across the board has eased some of the pressure on consumers. Cheaper gas tank prices and less rapid increases in grocery store prices have contributed to further increases in salaries. But for Fed officials, signs that inflation is still stubborn beneath the surface are cause for concern. Officials believe efforts should be made to lower the core inflation rate so that the economy’s future is moderate and stable.
Fed policymakers have been raising interest rates since March 2022 in a bid to cool the economy and bring inflation back under control, and expect to raise interest rates slightly further in 2023. Business can impede economic momentum.
But a recent set of data suggests that the Fed’s actions so far have failed to completely sap the economy’s momentum. The housing market, which suffered a significant downturn last year, is showing signs of starting to recover. This week’s data showed growth earlier this year was faster than previously thought. People still buy cars, go on vacation, and eat out based on various real-time data trackers.
Indeed, Nationwide chief economist Cathy Bojancic warned against reading too much into the slowdown in consumer spending from the latest May data. Some of the backlash, she thought, was probably due to a limited supply of cars, which has hampered growth in car sales.
Still, he said the report is marginally good news for policymakers. The fact that spending in April was weaker than the strong increase previously reported is perhaps a welcome development.
“Better than alternatives,” Bostjancic said.
And the report contained subtle but important hints that consumers are becoming more cautious. After months of draining their savings amid rising prices, Americans began saving more, a historical sign of economic concern.
“Consumers are probably exercising caution and saving because many believe a recession is coming or imminent,” Robert Frick, a corporate economist at the Navy Federal Credit Union, said in a note to clients. We are increasing and spending less,” he said.
This could reassure the Fed that interest rates are high enough, or almost high enough, to keep the economy in check and push inflation back on target over time.
Policymakers raised interest rates to 5% but skipped a June meeting after 10 consecutive hikes to give them time to assess how much more would be needed. Officials expect the rate to rise to 5.5% by the end of the year.
Investors have been betting on another quarter of points gains this year, but in the last few days they have nudged the odds of a double gain by the end of 2023. After Friday’s report, that probability dropped slightly. Markets widely welcomed the new data, which contributed to the S&P 500 gaining more than 1% on Friday morning.
Bojancic thinks the Fed is still likely to raise rates in July, but Friday’s consumer spending data could ‘relieve the pressure’ for further changes beyond that, at least by a close margin said there is.
Fed Chairman Jerome H. Powell stressed at an event in Madrid this week that there is uncertainty about how far interest rates will move further this year.
Powell said inflation has consistently been “more sustained and stronger than expected.” “At some point, that may change.
Joe Rennison contributed to the report.