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US prices high but stable in May, spending slowing – AFR

A key US inflation gauge showed that price increases held steady over the 12 months to May while consumer spending growth slowed sharply, boding well in the fight against rising prices.

The trend could bring comfort to consumers and central bankers alike, as it is a sign that the Fed’s aggressive interest rate strategy is starting to have an impact to quell the fastest rise in inflation in more than 40 years.

The personal consumption expenditure (PCE) price index rose 6.3 percent compared to May 2021, still high but at the same pace as the previous month, although it rose 0.6 percent compared to April, the Commerce Department reported on Thursday .

The index rose 0.6 percent from April, much faster than the previous month but slightly below economists’ forecasts.

But spending rose just 0.2 percent, less than half of April’s rise and part of a steady downward trend as consumers retreat amid rising prices.

Buoyed by a stash of savings backed by massive government bailouts, consumers have been the linchpin of the US’s rapid recovery from the pandemic crisis.

But strong demand collided with the snarl of the global supply chain, and the world’s largest economy has been plagued for months by a wave of inflation made even more painful by the surge in energy prices triggered by Russia’s invasion of Ukraine in late February.

Excluding volatile food and energy prices, PCE rose 0.3 percent for the month, unchanged from April, and slowed slightly to 4.7 percent last year, the report said.

– Fed inflation fight –

The PCE price index is the Federal Reserve’s preferred indicator of inflation because it reflects actual consumer spending, including shifts to lower-cost items, in contrast to the better-known CPI, which rose 8.6 percent in May.

PCE also gives less weight to things like rent, vehicles and airfare, which have contributed to the rapid pace of CPI growth.

The Fed earlier this month announced the largest hike in benchmark interest rates in nearly 30 years, a three-quarter-point hike that was the third step in its counter-offensive against rising inflation aimed at cooling demand.

Policymakers are closely monitoring spending and inflation data and have signaled a good chance of another similar surge in late July, followed by more big moves in the coming months.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that the three-month average annual increase had fallen to the slowest pace since November and “a sharp deceleration from February’s peak of 5.7 percent.”

“A combination of slower wage growth, lower margin inflation and the stronger dollar is starting to drive a significant slowdown in core inflation,” he said. But: “We have to go much further.

– Slower outputs –

Signs of a slowdown in consumers will weigh on second-quarter GDP growth after the Commerce Department revised down sharply first-quarter consumer spending, cutting it to 1.8 percent from 3.1 percent, while the economy expanded by 1. 6 percent shrank.

The main reason for slower consumption growth in May was the sharp decline in spending on high-value industrial goods, known as durable goods, which fell 3.2 percent for the month, the report said.

Economists note that this reflects a decline in vehicle sales.

Services spending rose 0.7 percent for the month, the same as in April.

High Frequency Economics’ Rubeela Farooqi said the Fed will continue its efforts to tame prices.

“With the threat of persistent inflation in focus, this data is unlikely to change interest rates, which remain firmly higher,” she said in an analysis.

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