US Consumer Spending Picks Up as Inflation Hits Three-Year High

Shoppers in San Francisco, California. Photographer: David Paul Morris/Bloomberg Photo by David Paul Morris /Bloomberg

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(Bloomberg) — US consumer spending accelerated in May even as prices rose at the fastest pace in more than three years, suggesting Americans are powering through the fallout from the Iran war.

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The personal consumption expenditures price index rose 4.1% from a year earlier, the most since April 2023, Bureau of Economic Analysis data out Thursday showed. Excluding food and energy, prices were up 3.4% from a year earlier.

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Inflation-adjusted consumer spending rose 0.3% last month after stalling in April.

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The numbers are likely to keep pressure on the Federal Reserve to raise interest rates this year. Despite the recent peace negotiations between the US and Iran that have sent oil prices tumbling, economists expect the costs of an array of products to continue rising as the initial energy shock works its way through supply chains.

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Looking ahead, the recent pullback in gasoline prices could offer consumers some reprieve, though prices at the pump are still almost $1 a gallon higher on average than before the war started.

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Given the sharp drop in oil prices, “it is highly likely that inflation peaked in May,” Joe Brusuelas, the chief economist at RSM US, said in a note. Underlying inflation, however, “will not retreat so easily” given price pressures that remain in the pipeline.

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Higher-than-usual tax refunds have helped bolster consumers in recent months, while a reaccelerating labor market and rising stock prices are also supporting spending. Even so, workers across sectors have seen pay gains fail to keep up with inflation, which has many saving less or turning to credit cards to maintain consumption habits.

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There was good news on that front in Thursday’s figures: Personal income, a metric which is not adjusted for inflation, rose 0.7%, while wages and salaries advanced 0.4%. 

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When adjusting for inflation, disposable income rose 0.3%, marking the first increase since the start of the year. The saving rate held at 3%, the lowest since 2022.

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GDP Revision

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A separate report showed the US economy grew at an annualized 2.1% pace in the first quarter, faster than previously estimated, though that primarily reflected a downward revision to imports. Consumer spending, meanwhile, was marked down to 0.5% from 1.4%, marking the smallest quarterly advance in four years.

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Outside of the war’s direct impact on energy prices, categories in both goods and services saw firm price increases in the May report. A closely watched metric of services inflation that excludes energy and housing advanced 0.5%, the most since January. Financial services prices rose by the most in almost a year, while transportation services and healthcare also posted strong increases.

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Prices of computer software and accessories rose a record 14.5% from a year earlier, in part reflecting strong demand from the data center buildout.