free webpage hit counter

Income and expenditure were lower than prices in May

Americans’ income and spending failed to keep pace with rising prices in May, the latest sign that the fastest inflation in a generation is chipping away at the base of the economic recovery.

Consumer spending, adjusted for inflation, fell for the first time this year, down 0.4 percent from April, the Commerce Department said Thursday. In addition, the government said spending rose more slowly in the first four months of the year than previously reported, and after-tax income adjusted for inflation fell slightly.

The report offered new evidence that the US economy hangs in a delicate balance as the Federal Reserve tries to bring inflation under control. Policymakers want to cool consumer demand for goods and services, which outstrips supply, driving up prices. But if the central bank aggressively stifles demand when prices are already depressing consumption, it could trigger a recession.

Consumers have hardly stopped spending. Aggregate demand is up, especially for vacation travel, restaurant meals and other services many families avoided earlier in the pandemic.

Still, several forecasters said Thursday that they now believe U.S. gross domestic product, adjusted for inflation, shrank in the second quarter. That’s the second decline in a row — the common, though unofficial, definition of a recession. Most economists say the United States has not yet entered a recession under the more formal definition, which takes into account various economic indicators, but they say the risks are growing.

Data released on Thursday hinted at some potential moderation in inflation. The personal consumption expenditures price index, the Fed’s official target for inflation averaging 2 percent over time, rose 6.3 percent from a year earlier, matching the April increase. From a month ago, it gained 0.6 percent, the fastest pace as gas prices rose.

But the core price index, which strips out volatile food and fuel prices, rose 4.7 percent over the past year, down slightly from 4.9 percent in the previous reading. That key measure rose 0.3 percent from April, roughly in line with the previous few months.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said policymakers are “probably sitting there quietly and feeling a little relieved” that core price increases are moderating. But inflation remains so high that its outlook depends on variables such as the war in Ukraine, and the latest data is unlikely to change the Fed’s course.

“Now is not the time to herald a potential victory,” Mr Shepherdson said.

Inflation is taking a toll on consumers’ finances and their financial outlook. Fifty-two percent of American adults say they are worse off financially than they were a year ago, according to a June 13-19 New York Times poll by online research platform Momentive. Ninety-two percent are concerned about inflation, with 70 percent saying they are “very worried.”

Until recently, there was little indication that the unhappy mood of consumers was having a major impact on their spending. But that may be starting to change. Consumer spending, not adjusted for inflation, rose 0.2 percent in May, the weakest gain this year, and spending on goods where price increases are the fastest fell.

In other areas, consumers are spending more but getting less: Households bought the same amount of gasoline in April as in May, for example, but paid 4 percent more for it.

Tim Trull put $35 worth of gas in his truck on a recent Friday and was empty again after a weekend trip to visit his parents 30 miles away. So they are looking for other places to cut back. Trips to the grocery store are a dull routine: bread, cheese, eggs, milk, any lunch meat on sale. Mr. Trull said he no longer walked the meat aisle.

“I like my raisin husks, but I can’t buy raisin husks,” he said. “A box of raisin bran is about $7 right now.”

Mr. Trull, 51, received a 50-cent-an-hour raise at Christmas, but inflation has more than wiped it out — especially since the furniture plant where he works in Hickory, NC, has begun cutting overtime. Now, speaking of recession, he is worried about losing his job.

“I have some bad feelings that eventually it’s going to collapse and they’re going to start laying people off again,” he said. “Who buys furniture when you’re deciding on gas, food, or a new love seat?”

Stories like Mr. Trull’s highlight the danger the economy faces if the job market slows. Despite the drop in May, Americans’ incomes, overall, were up thanks to inflation thanks to rising wages and strong job growth.

The job market is likely to cool in the coming months, however, as the Fed raises interest rates in an effort to curb inflation. Weak wage growth and slower job gains — or, worse, outright job losses — will dampen income growth and make people more reluctant to dip into their savings. That could make the recession worse.

“If we start to see a slowdown in job growth, if we start to see some slowdown in wage growth, if we start to see a pickup in unemployment claims, I think the story will really start to change,” Michelle Meyer said. Chief US Economist at the MasterCard Economics Institute.

US households built up trillions of dollars in savings during the pandemic, in part thanks to government assistance. Those savings, at least in theory, help consumers spend even if their incomes fall behind inflation. Households are already saving less to spend: Americans saved 5.4 percent of their after-tax income in May, up slightly from April but down from the roughly 7 percent rate in years before the pandemic.

But households may be reluctant to dig too deep into their rainy-day cash if they’re worried about a possible recession, said Pablo Villanueva, senior US economist at UBS.

“Over the past few months, consumers have begun to rely more on the low savings rate to finance consumption, and this can only continue for so long, especially in the context of weak consumer confidence,” he said.

Leave a Reply

Your email address will not be published.

Previous post STA unveils the history pole given by artist Tlingit Preston Singletary
Next post Cheap live artist apartments open for demand