The latest data showed that U.S. inflation showed a cooling in May, and consumer spending increased for the fifth consecutive month. That means the economy remains resilient. The Fed is considering whether it can resume raising interest rates at its July meeting.
Consumer spending, the main driver of the economy, rose 0.1 percent in May from a month earlier, according to a Commerce Department report released on Friday, after a revised 0.6 percent increase in April versus expectations of a 0.2 percent increase.
More specifically, Americans spent more on things like health care and air travel, while spending on things like cars fell. After adjusting for inflation, monthly income growth in May was 0%.
In line with the Fed’s ambitious inflation target, the PCE price index rose 3.8 percent in May from a year earlier, down from 4.3 percent in April and falling below 4 percent for the first time since April 2021.
Excluding volatile food and power prices, the focus PCE for the month was 4.6%, slightly lower than the previous value of 4.7%. Economists believe that focus inflation is a better predictor of unpaid prices than headline inflation.
On a month-on-month basis, the overall PCE index rose 0.1% in May, in line with expectations and significantly slower than the previous 0.4%.
Fed officials have been particularly concerned lately about the cost of labor-intensive businesses. They believe that this category, which excludes food, power, housing and commodities, is a reminder of whether artificial pressures in the labor market are being transmitted to consumer prices, especially in the context of an expected slowdown in housing and commodity price increases.
They rose 0.2% in May from a month earlier, according to the Wall Street Journal’s calculations, slowing from a 0.4% gain in April.
Joseph LaVorgna, chief economist at SMBC Nikko Securities, said, “Consumer longevity is declining, but it’s still holding up well.” He said lower interest rates, as well as the end of the suspension of student debt during the coronavirus pandemic, could have an impact on consumer income in the next few months.
Consumer output has been strong so far this year, thanks to a strong Labour market and steady artificial growth. It has also pushed Fed officials to estimate at least two more quarter-point rate hikes before the end of the year, with President Jerome Powell indicating the central bank is ready to raise rates at its July strategy meeting, which would take the federal funds rate to its highest level in 22 years.
“The economy has been stronger than expected, the labor market has been tighter than expected, and inflation has been higher than expected,” Powell said at a rally in Portugal on Wednesday.
Related data released on Thursday showed that the number of unemployed workers fell at the start of last week, while first-quarter GDP growth was stronger than previously estimated. Other recent data suggest falling sales of new homes, durable goods orders and consumer sentiment.
Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said the slowdown in consumption and inflation is welcome news for the Fed, but the pause is unlikely to change its near-term strategy because policymakers are firmly under the assumption that Interest rates need to be brought down further to a more restrictive attitude.”
In the CME’s “Fed Watch,” traders estimate there is about an 87 percent chance the Fed will raise interest rates by 25 basis points in July.
Meanwhile, eurozone inflation also showed a sharper than expected slowdown, albeit slower than in the US. Eurostat data released on the same day showed that the eurozone’s compromise consumer price index (CPI) increased by 5.5% year-on-year in June, lower than the previous reading of 6.1% and the expected 5.6%, and also the lowest level since the beginning of last year.
Excluding volatile drivers, food, alcohol and tobacco prices, the euro area focus CPI increased by 5.4% year-on-year in the month, lower than the expected 5.5%, but slightly lower than the previous 5.3%. This is an attack on the ECB. The central bank has said it will continue to raise interest rates until underlying price pressures fall significantly to its goal of 2 percent.
Jack Allen-Reynolds, an economist at Capital Economics, said the latest data would not stop the ECB from raising interest rates by another 25 basis points at its July meeting and there was a good chance of another increase in September.
Specifically, in June, euro zone power prices rose 5.6% year on year, compared with a previous increase of 1.8%. The increase in food, alcohol and tobacco prices also slowed to 12.5 per cent, while inflation for non-powered industrial goods eased to 5.5 per cent.
But these factors were offset by a 5.4% increase in business prices. The rise reflects a sharp drop in transport costs in Germany, where authorities have raised bus and train fares.
Headline inflation fell in 18 of the euro zone’s 20 member states. Only Germany fell, Croatia was flat; Inflation in Spain, Belgium and Luxembourg fell below the ECB’s 2% target for the first time in more than a year.
Christine Lagarde, the president of the European Central Bank, told an annual forum in Portugal this week that the bank’s fight against inflation was “not yet declared a success.” The central bank raised its inflation forecast in early June on the assumption that rising wages would push up the cost of labour-intensive businesses.
The euro zone’s labor market continued to tighten in May, with 57,000 more people unemployed than the previous month and the unemployment rate at a record low of 6.5 percent, Eurostat said on Friday.