Consumer spending in the US accelerated in May, while prices rose at the fastest pace in over three years, indicating that Americans are overcoming the effects of the war in Iran.
The personal consumption expenditures price index rose by 4.1% in May compared to the previous year, the highest level since April 2023, according to data released Thursday by the Bureau of Economic Analysis. Excluding food and energy, prices increased by 3.4% year-over-year. Inflation-adjusted consumer spending rose by 0.3% from the previous month after stagnating in April. These figures are likely to increase pressure on the Federal Reserve to raise interest rates this year.
Despite recent peace talks between the US and Iran, which led to a drop in oil prices, economists expect the cost of various products to continue rising as the initial energy shock moves through supply chains. Although the recent decline in gasoline prices may provide some relief to consumers, prices at the pump are still nearly $1 per gallon higher on average than before the war.
Higher-than-usual tax refunds have supported consumers in recent months, while a tightening labor market and rising stock prices are also bolstering spending. However, workers across various sectors are experiencing wage growth that lags behind inflation, forcing many to save less or rely on credit cards to maintain their spending habits. There was some good news on Thursday: personal income, a figure not adjusted for inflation, rose by 0.7%, while wages and salaries increased by 0.4%. Adjusted for inflation, disposable income rose by 0.3%, marking the first increase since the beginning of the year. The savings rate remained at 3%, the lowest level since 2022.
Economic growth and consumer trends
A separate report showed that the US economy grew at an annual rate of 2.1% in the first quarter, faster than previously estimated, although this primarily reflected a downward revision of imports. Consumer spending was revised to 0.5% from 1.4%, marking the smallest quarterly increase in four years.
In addition to the direct impact of the war on energy prices, the May report indicated significant price increases in various categories of goods and services. An important measure of services inflation, which excludes energy and housing, rose by 0.5%, the highest level since January. Prices for financial services saw the largest increase in nearly a year, while transportation services and healthcare also experienced significant rises.
Companies such as Kroger Co. report that consumers are seeking better deals as higher gasoline prices strain family budgets. Lowe’s Cos. noted that customers are postponing major purchases. “This is a healthy consumer, but the broader macroeconomic situation is causing some hesitation,” said Lowe’s CEO Marvin Ellison at a conference this month.
Separate data released on Thursday showed that initial jobless claims fell by 12,000 to 215,000 last week, another sign of labor market resilience. Another report indicated that orders for durable goods in May fell by 4.5%, the largest drop in nearly a year.
Source: Bloomberg