Despite prices rising at their fastest pace in over three years, US consumer spending accelerated in May, indicating Americans are weathering economic pressures.
Data released Thursday showed the personal consumption expenditures (PCE) price index increased 4.1% year-on-year in May, marking the largest gain since April 2023 and aligning with market expectations. The core PCE price index, which excludes food and energy, rose 3.4% year-on-year, also meeting forecasts.
After adjusting for inflation, real personal consumption expenditures grew 0.3% month-on-month in May, following a stagnant reading in April. A separate report indicated the US economy grew at an annualized rate of 2.1% in the first quarter, surpassing market expectations.
Despite the intensification of inflation in May, consumer spending remained resilient. These inflation figures could continue to pressure the Federal Reserve to raise interest rates this year. While recent geopolitical developments have led to a sharp drop in oil prices, economists anticipate costs for a range of goods will keep rising as the initial energy shock works its way through supply chains.
Looking ahead, the recent retreat in gasoline prices may offer some relief to US consumers, though average pump prices remain nearly $1 per gallon higher than pre-conflict levels. Given the significant decline in oil prices, "inflation likely peaked in May," RSM US chief economist Joe Brusuelas stated in a report. However, he noted that underlying price pressures are persistent and "won't recede easily."
A resilient labor market and rising stock markets may also support consumption, but workers across various sectors find wage growth lagging behind inflation, prompting many to reduce savings or turn to credit cards to maintain spending habits.
Thursday's data showed that US personal income, not adjusted for inflation, rose 0.7% month-on-month in May, with wages and salaries increasing 0.4%. Inflation-adjusted disposable income grew 0.3%, marking its first increase this year. The savings rate held steady at 3%, its lowest level since 2022.
Retailers have noted that consumers are increasingly seeking value as higher fuel prices squeeze household budgets, with some customers postponing purchases of big-ticket items. The overall consumer is in good shape, but macroeconomic uncertainty is causing some hesitation, according to recent commentary from industry executives.
Other data released Thursday showed initial jobless claims fell by 12,000 to 215,000 last week, signaling labor market strength. A separate report indicated durable goods orders dropped 4.5% in May, the largest decline in nearly a year.
Following the release of this economic data, the yield on the interest rate-sensitive two-year US Treasury note fell 4 basis points to 4.10%. The benchmark 10-year Treasury yield declined 3 basis points to 4.36%. Trading in interest rate swaps showed traders scaled back bets on Federal Reserve rate hikes this year. Pricing now implies roughly 33 basis points of tightening by December, down from about 36 basis points at Wednesday's close. The pricing also reflects a further reduced probability of a rate hike at the Fed's July meeting.
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