Finance

Consumer spending fell in May as food, fuel prices stoked inflation

Spencer Platt/Getty Images
A man walks by a grocery store in Brooklyn.

Consumer spending dropped in May as food and fuel prices rose sharply, according to data released Thursday by the Commerce Department.

Personal consumption expenditures (PCE), a measure of consumer spending, rose 0.2 percent in May but fell 0.4 percent when adjusted for inflation. While personal incomes rose 0.5 percent in May, they fell 0.1 percent after adjusting for inflation.

The decline in consumer spending came as prices rose 0.6 percent overall in May, according to the Commerce Department’s PCE price index, a gauge of inflation. Without food and fuel prices, the PCE index rose 0.3 percent for the third consecutive month in May.

The PCE index rose 6.3 percent in the 12 months ending in May, in line with April’s annual inflation rate, and 4.7 percent without energy prices. The annual increase in the PCE without food and energy fell to 4.7 percent in May, declining for the third consecutive month.

While prices for other goods and services appeared to plateau in May, the steep increase in food and energy prices driven largely by the war in Ukraine took a serious toll on consumer spending. Higher interest rates set by the Federal Reserve, which are meant to fight inflation, may have also weighed on consumer spending in May.

Inflation has remained close to 40-year highs for several months and has risen steadily for more than a year, far outdating the February outbreak of the war in Ukraine. But severe shortages of food, fertilizer, and other crucial commodities from Russia and Ukraine, along with the sharp increase in demand for oil, have added more pressure to inflation.

The Fed aims to cool off inflation by raising its baseline interest rate range, which boosts borrow costs throughout the economy. As consumers and businesses face higher interest rates, they tend to slow their spending on goods and services already in high demand. When sales slow and profit margins decrease, firms often stabilize or lower prices, along with slowing down their hiring and wage increase.

The Fed is hoping to cool the economy off enough to reduce inflation without causing economic growth to decline for a second consecutive quarter or wipe out job gains, which have remained strong for more than a year. Even so, Fed officials and economists outside of the central bank say the Fed has slimming odds of bringing inflation down without causing a recession.

“We fully understand and appreciate the pain people are going through dealing with higher inflation. We have the tools to address that and the resolve to use them,” Federal Reserve Chair Jerome Powell said Wednesday at a conference in Portugal.

“The process is likely — highly likely — to involve some pain, but the worst pain would be from failing to address this high inflation and allowing it to become persistent.”

Powell said the Fed cannot afford to allow inflation to spiral higher and allow businesses and consumers to think price increases will only get worse into the future. When consumers and businesses only expect inflation to keep rising, workers are likely to demand ever-higher wages to keep up with rising prices, which could force businesses to keep raising prices to keep up with wages.

Even so, halting inflation could require the Fed to raise interest rates to a point where businesses can no longer afford to hire new employees and spending slows enough to shrink the size of the economy. The Fed also has no ability to spur more oil production or solve supply shocks created by the war in Ukraine, which pushes prices across the economy higher as consumers see their real incomes decline.

Updated at 10:08 a.m.

Tags Consumer spending economy Food prices Fuel prices Inflation Jerome Powell
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