By Geoffrey Smith
Investing.com -- U.S. inflation weakened in May as consumers reduced their spending in response to this year's surge in prices, data released on Thursday showed.
The price index for core personal expenditures - the Federal Reserve's preferred gauge of changes in the cost of living - rose only 0.3% in the month, leading the annual rate to fall to 4.7% from 4.9%, a slightly bigger drop than that forecast by economists ahead of time.
Helped by last year's price rises passing out of the calculations, the year-on-year rate has now fallen for the last three months, strengthening those who believe that it may have peaked.
However, some analysts warned that ongoing momentum in prices remains worrying. The monthly rise was still above its pre-pandemic trend, while the headline PCE inflation rate of 6.3%, which includes spending on food and energy, remains close to its 40-year high. Food prices rose 1.2% on the month, while energy prices - largely gasoline - rose 4.1%.
At the same time, personal spending notched its slowest growth in five months, with a gain of only 0.2%, while April's figure was also revised down to a gain of only 0.6% from an initial estimate of 0.9%. That, too, was weaker than forecasts. Personal income rose 0.5% on the month, largely reflecting pay increases, but was still lagging the 0.6% rise in overall PCE prices. AnnElizabeth Konkel, an economist with Indeed, noted via Twitter that this was the first time since December that income, adjusted for inflation, had fallen. Even so, she noted, it remains 4.4% above pre-COVID levels, suggesting that consumption is still running ahead of trend.
The savings ratio, meanwhile, ticked up to 5.4%, after hitting its lowest since the Great Financial Crisis earlier this year.
Overall, the data are evidence of the economy cooling as high prices force consumers to cut back, at least, on non-essential spending. They also reflect the change in spending patterns as pandemic concerns ease. Spending on durable goods of all sorts declined again, as more of households' budgets were taken up by rising costs for essentials such as food, energy, and housing. Discretionary spending was again concentrated in transportation and other services, the latter of which was up 18.7% from a year earlier. By contrast, spending on new and used cars was down by over half.
Elsewhere, the Labor Department reported another set of data suggesting a modest but sustained rise in lay-offs as the economy starts to cool: initial claims for jobless benefits came in at 231,000 for last week, little changed from an upwardly revised 233,000 the week before, which was the highest such number since February.