US consumer spending slowed more than expected last month as US households grapple with historically high levels of inflation.
Personal consumption rose just 0.2% in May, down sharply from the 0.6% rise in the previous month and below economists’ expectations for a 0.4% gain, a the Commerce Department announced Thursday.
Adjusting for inflation, spending contracted 0.4% last month.
Consumer spending is the main driver of the US economy and economists are watching closely for signs of a downturn. The data comes a day after a revision to the first quarter GDP report showed personal consumption rose just 1.8% from previous reports of a 3.1% increase.
“The drop in real consumer spending in May underscores that there is a limit to inflation that American consumers are willing and able to tolerate,” said Lydia Boussour, economist at Oxford Economics.
US households appear to have supported their spending levels in the face of skyrocketing inflation by tapping into their pandemic savings. Personal income rose 0.5% in May, but fell 0.1% after adjusting for inflation and taxes. Meanwhile, the savings rate rose slightly to 5.4%, but remains well below its pandemic-era peak of more than 30%.
The spending cut came as overall price pressures intensified last month. The personal consumption expenditure price index rose 0.6% month on month, after rising 0.2% in April. The annual PCE remained up 6.3%.
The so-called core PCE, the Federal Reserve’s favorite inflation measure that excludes volatile items like food and energy, rose 0.3% month-on-month, similar to April. . On an annual basis, core PCE fell to 4.7% from 4.9% in April, beating analysts’ expectations of 4.8%.
The Fed has hinted that another 0.75 percentage point rate hike is on the table at its meeting next month, having already achieved its first three-quarter point increase since 1994 this month so as policy makers rush to get inflation under control.