Consumer spending fell in May as food and fuel prices rose sharply, according to data released by the Commerce Department on Thursday.
Personal consumption expenditures (PCE), a measure of consumer spending, rose 0.2 percent in May but fell 0.4 percent when adjusted for inflation. Personal incomes rose 0.5 percent in May, but after adjusting for inflation they fell 0.1 percent.
According to the Commerce Department’s PCE price index, a measure of inflation, consumer spending eased as prices rose 0.6 percent overall in May. Excluding food and fuel prices, the PCE index rose 0.3 percent in May for the third consecutive month.
The PCE index rose 6.3 percent in the 12 months ended May, in line with April’s annual inflation rate, and 4.7 percent excluding energy prices. The annual increase in PCE excluding food and energy fell to 4.7 percent in May, the third straight month of declines.
While prices of other goods and services appeared to plateau in May, steep increases 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 is meant to fight inflation, may weigh on consumer spending in May.
Inflation has been near 40-year highs for several months and has risen steadily for more than a year, outpacing the February outbreak of war in Ukraine. But severe shortages of food, fertilizer and other critical commodities from Russia and Ukraine, along with a sharp increase in demand for oil, have added further pressure to inflation.
The Fed aims to cool inflation by raising its benchmark interest rate range, which will raise borrowing costs throughout the economy. As consumers and businesses face higher interest rates, they slow their spending on goods and services that are already in high demand. When sales slow and profit margins decrease, firms stabilize or lower prices, along with slowing their hiring and wage increases.
The Fed is hoping to cool the economy to reduce inflation without causing economic growth to fall for a second consecutive quarter or wipe out job gains that have remained strong for more than a year. Even so, Fed officials and central bank economists say the chances of reducing inflation without triggering a recession are slim.
“We fully understand and appreciate the pain experienced by people facing high inflation. We have the tools to address it and the determination to use them,” Federal Reserve Chair Jerome Powell said at a conference in Portugal on Wednesday.
“The process will likely — more than likely — involve some pain, but the worst pain is failing to address this hyperinflation and allowing it to persist.”
Powell said the Fed cannot allow inflation to rise and businesses and consumers to think that price increases will get worse in the future. When consumers and businesses only expect inflation to rise, workers are likely to demand higher wages to keep up with rising prices, which forces businesses to raise prices to keep up with wages.
Even so, stopping inflation would require the Fed to raise interest rates to the point where businesses can no longer hire new workers and spending slows enough to shrink the size of the economy. The Fed has no ability to stimulate more oil production or address supply shocks created by the war in Ukraine, which will raise prices across the economy as consumers see their real incomes fall.
–Updated at 10:08 am