US consumers take spending breather in May while inflation climbs

The engine of the US economy, consumer spending, was flat in May while inflation continued to rise.

Consumers in the United States maintained a brisk rate of spending in May, but incomes and savings fell as the windfall of government pandemic-related largesse fades [File: Steven Senne/AP Photo]

Consumers in the United States maintained a brisk rate of spending in May, but incomes and savings fell as the windfall of government pandemic-related largesse fades and some states opt out of federal unemployment benefit programmes.

Personal consumption expenditures (PCE) – a measure of consumer spending – was unchanged in May from the month before, the US Bureau of Economic Analysis (BEA) said on Friday, as an increase in spending on services was offset by a decrease in spending on goods.

Adjusted for inflation, PCE fell 0.4 percent last month from April.

PCE is a closely watched indicator because consumer spending drives roughly two-thirds of US economic growth. After rising sharply in March and continuing to climb in April, spending hit cruising altitude in May.

The plateau reflects “a decrease in government social benefits”, said the BEA in a press release, as fewer stimulus cheques hit American bank accounts last month, and some states opted out of federal unemployment benefits programmes.

The $300 federal weekly top-up to state unemployment benefits has become a political football in the US as businesses across the country struggle to find workers even though millions of Americans are still out of work.

Some Republicans argue that the federal top-up is disincentivising unemployed workers to find jobs.

Some 26 US states have said they are pulling out federal pandemic unemployment assistance programmes, which includes the federal weekly top-up.

But economists point to other reason that may be keeping workers on the sidelines, from early retirements and a lack of childcare options during the pandemic, to fear of contracting COVID-19. Labour bottlenecks as businesses reopen and ramp up all at once could also be contributing to the disconnect between the number of jobless and the number of job openings that need to be filled.

Waning government stimulus was reflected in personal incomes in May, which fell 2 percent from the month before. Disposable incomes took a bigger hit, falling 2.3 percent.

Meanwhile, inflation continues to march upward as supply chain bottlenecks in the wake of pandemic restriction rollbacks raise prices of raw materials and weigh on businesses trying to expand operations.

The PCE price index – which is the Federal Reserve’s preferred measure of inflation – rose 0.4 percent last month from April’s reading. Excluding food and energy, it rose 0.5 percent.

Compared to the same period a year ago, the PCE price index was up 3.9 percent.

Rising prices hit less well-off households especially hard because it eats away at a larger share of their incomes.

For now though, the steward of the world’s largest economy, the Federal Reserve, is prioritising getting Americans back to work over inflation concerns.

Fed chief Jerome Powell has repeatedly said the current inflation spike is likely to prove temporary, and the Fed has no plans to raise interest rates until the nation’s job market is healed.

Source: Al Jazeera


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