US inflation hits three-year high as consumer spending rebounds

US consumer spending rose in May despite the highest inflation in over three years, reinforcing expectations that the Federal Reserve may raise interest rates

US consumer spending accelerated in May even as prices rose at the fastest pace in more than three years, suggesting Americans are powering through the fallout from the Iran war.

 

The personal consumption expenditures price index rose 4.1% last month from a year earlier, the most since April 2023, Bureau of Economic Analysis data out Thursday showed. Excluding food and energy, prices were up 3.4% from a year earlier.

Inflation-adjusted consumer spending rose 0.3% from a month earlier after stalling in April. 

The numbers are likely to keep pressure on the Federal Reserve to raise interest rates this year. Despite the recent peace negotiations between the US and Iran that have sent oil prices tumbling, economists expect the costs of an array of products to continue rising as the initial energy shock works its way through supply chains. 

 

Looking ahead, the recent pullback in gasoline prices could offer consumers some reprieve, though prices at the pump are still almost $1 a gallon higher on average than before the war started. 

Higher-than-usual tax refunds have helped bolster consumers in recent months, while a reaccelerating labor market and rising stock prices are also supporting spending. Even so, workers across sectors have seen pay gains fail to keep up with inflation, which has many saving less or turning to credit cards to maintain consumption habits. 

There was good news on that front in Thursday’s figures: Personal income, a metric which is not adjusted for inflation, rose 0.7%, while wages and salaries advanced 0.4%. 

When adjusting for inflation, disposable income rose 0.3%, marking the first increase since the start of the year. The saving rate held at 3%, the lowest since 2022. 

GDP Revision 

A separate report showed the US economy grew at an annualized 2.1% pace in the first quarter, faster than previously estimated, though that primarily reflected a downward revision to imports. Consumer spending, meanwhile, was marked down to 0.5% from 1.4%, marking the smallest quarterly advance in four years. 

Outside of the war’s direct impact on energy prices, categories in both goods and services saw firm price increases in the May report. A closely watched metric of services inflation that excludes energy and housing advanced 0.5%, the most since January. Financial services prices rose by the most in almost a year, while transportation services and healthcare also posted strong increases. 

Companies like Kroger Co. say consumers are seeking more deals as higher gas prices squeeze household budgets. Lowe’s Cos., meanwhile, says customers are putting off big-ticket purchases. 

“This is a healthy consumer, but the broader macro is giving them a bit of hesitation,” Lowe’s Chief Executive Officer Marvin Ellison said at a conference this month. 

Separate data out Thursday showed initial claims for unemployment benefits fell last week by 12,000 to 215,000, offering additional signs of labor market resilience. Another report showed durable goods orders fell 4.5% in May, the most in almost a year.