The news: Inflation is starting to weigh on US consumers’ spending as household consumer spending rose 0.2% month-over-month (MoM) in May, a slowdown from a downwardly revised 0.6% increase in April, per the US Commerce Department.
- But when those numbers are adjusted for inflation, that translates to a 0.4% drop. That’s the first MoM decline this year—and an abrupt shift from the 0.3% gain in real spending in April.
- The balance between spending on goods and services continues to regress toward pre-pandemic levels as goods outlay fell, while spending on services grew.
- The level of inflation remained high in May, though it increased slightly less than expected. Core personal consumption expenditure prices—which exclude volatile food and energy prices—rose 4.7% year-over-year (YoY), 0.2 percentage point less than the previous month and 0.1 percentage point less than a Dow Jones estimate, per CNBC. The measure has been declining since February, when it was 5.3%.
- On a monthly basis, the measure increased 0.3%, slightly less than the 0.4% Dow Jones estimate.
Looking ahead: Consumers continue to spend, as their YoY household spending rose 8.6% in May.
- But they are increasingly tapping into their savings. The savings rate inched up to 5.4%, after the rate fell to 5.2% in April, its lowest level in more than a decade in April.
A significant cooling off: Consumer spending appears to be losing steam.
- Spending on durable goods fell 3.2%, which shows that consumers are pulling back from big-ticket items, such as furniture.
- The slowdown is by design, as the US Federal Reserve is aggressively raising interest rates to combat inflation. However, it’s walking a delicate line to avoid driving a more significant consumer pullback that could tip the economy into a recession.
What it means for retail: Despite the challenging environment, we expect US retail sales to grow 6.4% this year.
- That growth is largely due to inflation, as consumers have the means to keep up with the rising costs of essential items like food and household products.