U.S. consumer spending stalled in May to the lowest growth rate this year as inflation remained elevated.
Consumer spending or personal consumption expenditures (PCE) only rose by 0.1 percent in May, according to a June 30 news release (pdf) by the U.S. Bureau of Economic Analysis (BEA). This is the lowest growth rate so far in 2023, equal to that of March. Compared to a year back, consumer spending in May 2023 rose by 3.8 percent—the lowest so far this year and down from a peak of 5.4 percent in January.
The stalling consumer spending comes as inflation remains high. The 12-month Consumer Price Index (CPI), a measure of annual inflation, came in at 4 percent in May. Inflation has remained at or above 4 percent for 25 months since April 2021.
The 4 percent inflation in May is double the Federal Reserve’s target rate of 2 percent annual inflation. During inflationary periods, the purchasing power of money declines. As a result, consumers’ spending habits can change, with people choosing to spend less.
In dollar terms, PCE rose by $18.9 billion in May. This included a $52 billion increase in services and a $33.1 billion decrease in spending on goods.
“Within services, the leading contributors to the increase were health care (led by outpatient services), ‘other’ services (led by international travel), and transportation services (led by air transportation). Within goods, spending on motor vehicles and parts (led by new light trucks) and gasoline and other energy goods were the largest contributors to the decrease.”Consumer spending is also affected by interest rates. Since March 2022, the Federal Reserve has bumped up its benchmark interest rates by 5 percentage points at 10 consecutive policy meetings in a bid to rein in inflation.
Consequently, the central bank’s interest rate currently sits in a range of 5 percent to 5.25 percent, the highest since 2007.
