US consumer spending edges up as inflation accelerates

[NEW YORK] US consumer spending edged up in April, with annual inflation accelerating to the highest level since 2023 as the Iran war drove up energy prices.

Inflation-adjusted consumer spending increased 0.1 per cent last month, while the personal consumption expenditures price index rose 3.8 per cent from a year earlier, a report from the Bureau of Economic Analysis (BEA) showed on Thursday (May 28). The so-called core PCE index, which excludes food and energy items, was up 3.3 per cent from a year earlier.

Separate BEA figures showed the economy expanded in the first quarter at a 1.6 per cent annualised pace, slower than previously estimated after downward revisions to inventory investment and consumer spending. The initial estimate last month showed 2 per cent growth.

The inflation figures follow calls from a growing number of Federal Reserve officials for the US central bank to signal that its next interest-rate move may not be a cut. Kevin Warsh, who on May 22 was sworn in as President Donald Trump’s new Fed chairman, will likely need to convince his new colleagues that rate hikes won’t be necessary to keep inflation expectations in check.

The numbers on spending, meanwhile, suggest consumers have become more cautious amid cost-of-living concerns and uneven hiring trends. The surge in prices for fuel and other materials sparked by the Middle East conflict is reverberating through the economy and has driven consumer sentiment to record lows.

Despite the acceleration in annual inflation, the closely watched monthly increase in the core PCE price index was 0.2 per cent, slightly lower than expected. US stock index futures pared losses after the release, while Treasury yields fell.

Personal income, a metric which is not adjusted for inflation, was flat in April. Inflation-adjusted disposable income fell 0.5 per cent, marking the third straight monthly decline. The saving rate dropped to 2.6 per cent, the lowest since 2022.

Retailers including Walmart have warned that high fuel costs are squeezing their bottom lines and may soon begin to show up in prices of products on their shelves. Higher tax refunds have helped support consumer spending in recent months, though they’ve been partly offset by prices at the pump rising to the highest levels in nearly four years.

Walmart chief financial officer John David Rainey told Bloomberg News last week that high-income consumers are “spending with confidence in many categories,” but low-income consumers are “more budget-conscious, trying to navigate certain financial distress.”

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While oil prices have come down this week, Brent futures remain more than 30 per cent higher than before the war began.

The report showed inflation-adjusted spending on so-called core goods fell 0.2 per cent, while prices rose 0.3 per cent. Inflation-adjusted services spending, meanwhile, rose 0.2 per cent and prices climbed 0.3 per cent. A closely watched metric of services inflation that excludes energy and housing was up just 0.1 per cent.

In April, computer software and accessories prices rose 5 per cent. Economists are increasingly paying attention to the category as the rapid data centre buildout pushes up costs. From November to March, it made an “unprecedented” contribution to core inflation, according to a study published last week which was co-authored by former Fed Governor Stephen Miran. BLOOMBERG