Inflationary pressures eased slightly in May as consumer spending fell significantly, according to a Commerce Department report released on Friday.
The consumer spending price index, a figure closely watched by the Federal Reserve, rose 0.3% for the month excluding food and energy, a figure consistent with the Dow Jones estimate. So-called core PCE rose 4.6% year-on-year, 0.1 percentage points less than expected.
In April, the index rose 0.4% mom and 4.7% yoy.
Factoring in the volatile food and energy components, inflation was significantly weaker – rising just 0.1% mom and 3.8% yoy. These were below the 0.4% and 4.3% gains reported in April. The year-over-year total was the lowest since April 2021, while the core count was the lowest since October 2021.
While inflation eased somewhat, spending rose just 0.1% for the month, below the 0.2% estimate and a sharp decline from April’s 0.6% rise. This slowdown came even as personal income grew by 0.4%, beating the 0.3% estimate.
“The spending boom is likely nearing its end as consumers have dumped most of the pent-up spending demand,” said Jeffrey Roach, chief economist at LPL Financial.
Although Friday’s data showed that inflation is beginning to move in the right direction, it is still well above the Fed’s longer-term target of 2%. Fed Chair Jerome Powell said this week that levels are likely to be several years from now.
At their early June meeting, Fed officials indicated that they expect at least two more quarter-point rate hikes before the end of the year. Even Atlanta Fed President Raphael Bostic, who advocates no further rate hikes, said Thursday that he doesn’t expect any rate cuts this year or in 2024.
Traders are looking at around an 87% chance of the Fed approving a quarter-point hike at its July meeting. According to calculations by the CME Group, the odds have changed little since the release of Friday’s data.
As prices have risen, consumers have slowed their spending pace and put more money away. The personal savings rate rose to 4.6% in May, compared to 4.3% in April.
Spending has also refocused on services, a departure from the Covid pandemic trend of consumers increasingly switching to higher-priced goods.
According to the Commerce Department’s Bureau of Economic Analysis, spending on services rose $52 billion this month while goods fell $33.1 billion. This came as goods prices fell 0.1% while services rose 0.3%.
Energy prices fell 3.9% while food prices rose just 0.1%.