Gas station in Sacramento, California on May 27, 2022.
AP Photo/Rich Pedroncelli, File
WASHINGTON (AP) — A measure of inflation closely watched by the Federal Reserve jumped 6.3% in May from a year earlier, unchanged from its April level.
Thursday’s report from the Commerce Department provided the latest evidence that painfully high inflation is straining American households and inflicting particular harm on low-income families and people of color.
The report also indicates that consumer spending grew at a slow rate of 0.2% from April to May. Consumer spending begins to weaken in the face of high inflation. But that still helps fuel inflation itself, especially as demand rises for services ranging from airline tickets and hotel rooms to restaurant meals and new and used cars.
“It really should come as no surprise that US consumers are cutting back on spending due to the high costs of, well, almost everything,” wrote Jennifer Lee, senior economist at BMO Capital Markets, in a research note. After adjusting for inflation, she noted, consumer spending actually fell 0.4% from April to May.
Month-over-month, according to Thursday’s report, prices rose 0.6% from April to May, up from the 0.2% increase from March to April.
Chronically high inflation has become a major threat to the economy and a political danger to President Joe Biden and Democrats as the midterm elections approach. Seventy-nine percent of American adults describe the economy as bad, according to a new survey from the Associated Press-NORC Center for Public Affairs Research. Inflation eclipses the healthy 3.6% unemployment rate as a focal point for Americans struggling, in particular, with high gas and food prices.
In response, the Fed has embarked on a series of aggressive interest rate hikes that aim to slow growth by making borrowing more expensive, but also risk triggering a recession. Two weeks ago, the Fed raised its key rate by three-quarters of a point – its biggest hike in nearly three decades – and announced more rate hikes to come.
The Fed tends to watch Thursday’s inflation gauge, called the personal consumption expenditure price index, even more closely than it tracks the government’s better-known consumer price index. While the components of the two indexes differ – the CPI tends to weigh gas and housing costs more heavily and show higher inflation – both gauges tell the same basic story: inflation is dangerously high.
The report also showed that consumer income rose 0.5% from April to May, remaining slightly ahead of inflation. Additionally, the savings rate edged up to 5.4% last month, though it remains well below its peak of nearly 34% in April 2020. At this time, millions of Americans were cashing government relief checks and saving money while staying home. a precaution against COVID-19.
The price spike is a consequence of the economy’s surprisingly rapid rebound from the pandemic recession of 2020. Boosted by government stimulus checks, historically low borrowing rates and savings accumulated while stuck at home them during the pandemic, consumers went on a spending spree that caught businesses overwhelmed and overwhelmed factories, ports and freight yards. The resulting shortages of goods and labor sent prices soaring.
The Fed has been slow to recognize the seriousness of the inflationary threat, dismissing it as a mostly temporary consequence of supply chain bottlenecks. But the price spike proved intractable, and now the central bank is trying to catch up with big rate hikes that could end up derailing the economy.
High inflation has made consumers increasingly worried about the economy. Prices rose faster than their incomes and eroded their purchasing power. A measure of consumer confidence hit a 16-month low as Americans’ outlook clouded by fears of inflation, particularly gasoline and food prices.