U.S. inflation remained stable in May, with a moderate increase in consumer spending – KNfins

U.S. inflation remained stable in May, with a moderate increase in consumer spending

In May, inflation in the United States remained stable, with unchanged prices while consumer spending saw a slight increase. This trend could prompt the Federal Reserve to consider interest rate cuts later this year.

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The Personal Consumption Expenditures (PCE) price index showed no change in May, following an unrevised increase of 0.3% in April, according to the Commerce Department’s report on Friday.

Over the 12-month period ending in May, the PCE index rose by 2.6%, a slight decrease from the 2.7% increase reported in April. This price stability, combined with the moderate rise in consumer spending, suggests a more balanced economic scenario, which may give the Federal Reserve confidence to adjust monetary policy and implement interest rate cuts soon.

Analysts are closely monitoring these economic data, as a rate cut could further boost consumer spending and economic growth. The Federal Reserve’s decision will depend on ongoing analysis of economic indicators in the coming months.

Economists surveyed by Reuters had forecast that the PCE index would remain unchanged for the month and rise by 2.6% year-over-year. This scenario reflects a stabilization after a period of high inflation in the first quarter, driven by the Federal Reserve’s rate hikes totaling 525 basis points since 2022, which cooled domestic demand.

Despite the moderation, inflation remains above the Fed’s target of 2%. Excluding the volatile components of food and energy, the core PCE index rose by only 0.1% last month, a slowdown compared to the 0.3% increase in April.

The core inflation rate increased by 2.6% in May compared to the previous year, marking the lowest rise since March 2021, down from 2.8% in April.

The Federal Reserve closely monitors the PCE price indicators as part of its monetary policy. To bring inflation back to target, monthly inflation rates of around 0.2% are deemed necessary.

Since July of last year, the Fed has maintained its key interest rate in the current range of 5.25% to 5.50%. This policy aims to align economic growth with price stability in an environment where inflationary pressures still exceed the central bank’s 2% target.

While officials have recently taken a stricter stance, financial markets expect the Federal Reserve to begin easing policy in September.

Consumer spending, which accounts for more than two-thirds of economic activity in the U.S., increased by 0.2% last month, following a 0.1% rise in April.

High inflation, increased borrowing costs, moderate wage growth, and reduced savings are putting pressure on consumer spending.

In the first quarter, consumer spending slowed significantly, contributing to a limited economic growth rate of 1.4% on an annualized basis, compared to an expansion of 3.4% in the fourth quarter.

Growth expectations for the second quarter predominantly indicate rates below 2%, reflecting an economic environment influenced by various factors, including consumer caution in light of current economic challenges.

This combination of high inflation, rising borrowing costs, moderate wage growth, and decreased savings exerts strong pressure on consumer spending.

In the first quarter, this pressure was evident in a marked slowdown in consumer spending, leading to an annualized economic growth rate of only 1.4%, compared to the expansion of 3.4% in the previous quarter.

Projections for the second quarter suggest growth predominantly below 2%, highlighting the ongoing challenges currently facing the U.S. economy. These factors continue to shape the expectations and decisions of both consumers and policymakers.

In recent years, inflation in the United States has been a topic of significant relevance and economic concern. Following a period of relative stability and low inflation rates in the early 2010s, a substantial increase in price indices has been observed since the mid-decade, particularly since 2020.

In 2021 and 2022, the United States faced inflation levels not seen in decades, with several factors contributing to this rise. Major causes included increases in energy, food, and durable goods prices, as well as significant pressure on transportation and logistics costs. Moreover, economic stimulus measures in response to the COVID-19 pandemic, including financial aid packages and quantitative easing by the Federal Reserve, also contributed to inflationary pressures.

The political response focused on balancing economic support with inflation management. The Federal Reserve, for example, adjusted its monetary policy to curb inflation, including gradual increases in short-term interest rates and reductions in monetary incentives. However, the issue persists, as inflation expectations continue to influence the decisions of consumers and businesses, shaping the economic discourse in the U.S.

In summary, inflation in the United States is characterized by a significant upward trend, especially since 2020. This phenomenon reflects a combination of factors, including commodity price pressures, high transportation and logistics costs, economic stimulus measures, and adjustments in monetary policy. Economic authorities, such as the Federal Reserve, have responded with measures aimed at balancing economic support with inflation control to ensure financial stability and promote sustainable growth. The challenge remains to find an appropriate equilibrium between these goals while the U.S. economy continues to respond and adapt to global and domestic economic challenges.

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Ella Bailey

an editor at KNfins since 2024.

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