US consumer spending takes breather; inflation pushes higher

[WASHINGTON] US consumer spending paused in May as shortages weighed on motor vehicle purchases, but the supply constraints and increased demand for services helped to boost inflation, with the Federal Reserve's main inflation measure posting its biggest annual increase since 1992.

The Commerce Department said on Friday that the unchanged reading in consumer spending, which accounts for more than two-thirds of US economic activity, followed an upwardly revised 0.9 per cent jump in April.

Consumer spending was previously reported to have increased 0.5 per cent in April. Economists polled by Reuters had forecast consumer spending would rise 0.4 per cent in May.

Motor vehicles and some house appliances are scarce because of supply bottlenecks stemming from the Covid-19 pandemic. A global shortage of semiconductors is hampering production of motor vehicles.

Spending is also starting to shift back to services, which accounts for two-thirds of consumer spending, weighing on goods. The pace is not yet sufficient to offset the drag on consumer spending from goods.

At least 150 million Americans are fully vaccinated against the coronavirus, allowing the economy to begin reopening and people to travel, dine out and engage in other activities that were restricted during the pandemic.

"Discretionary services demand is recovering rapidly as pandemic restrictions ease, but this is being offset by a slowdown in real retail sales," said James Sweeney, chief economist at Credit Suisse in New York. "Going forward, we expect overall consumer spending growth to remain strong as the services sector continues to normalize."

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 0.5 per cent after advancing 0.7 per cent in April. In the 12 months through May, the so-called core PCE price index shot up 3.4 per cent, the largest gain since April 1992.

The core PCE price index rose 3.1 per cent on a year-on-year basis in April. The core PCE price index is the Fed's preferred inflation measure for its flexible 2 per cent target.

Year-on-year inflation is also accelerating as last spring's weak readings drop from the calculation. Though the so-called base effects likely peaked in May, inflation will probably remain high in the near term because of the supply constraints and worker shortages, which are boosting wage growth.

"Even though the positive base effects will lessen in the second half of the year, sequential inflation is expected to remain strong given demand is unlikely to ease as the economy continues to reopen and as supply chains remain under pressure," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.

Some of the cooling in consumer spending reflected the ebbing boost from government stimulus checks. Personal income fell 2.0 per cent last month after declining 13.1 per cent in April. But wages increased 0.8 per cent after rising 1.0 per cent in April.

REUTERS