US consumer spending picked up in May, even as inflation accelerated to its highest level since April 2023. The Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred measure, rose at an annual rate of 4.1% in May, matching economists' forecasts. This is an increase from 3.8% in April and represents the fastest pace in three years. Core PCE, which excludes volatile food and energy prices, also rose, reaching 3.4%, slightly above the 3.3% forecast.
The surge in inflation was largely attributed to the Iran war, which drove up oil and gasoline prices, leading to the highest fuel costs in three years for American drivers. However, analysts noted that crude oil prices eased in June, suggesting that the May PCE report might mark the peak of this inflation surge. This drop in energy costs is not yet reflected in the latest PCE data. Despite the higher prices, real consumer spending, adjusted for inflation, rose 0.3% from April to May, and inflation-adjusted incomes increased by 0.3% for the first time in four months.
Economists believe that increased tax refunds and stock market gains helped households manage the negative impact of higher gasoline prices. Federal Reserve Chairman Kevin Warsh has reiterated the central bank's commitment to lowering inflation to its 2% annual target. While the Fed held its benchmark interest rate steady at its June 17 meeting, it did not rule out a rate hike later this year. Some economists suggest that robust GDP growth (2.1% annual rate in the first quarter) and potentially lower energy prices could lead the Fed to keep interest rates steady for some time. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, noted that the data indicates inflation remains above target and growth is solid, which will keep the Fed on hold until conditions allow for a cut.
