US consumer spending slowed sharply in May, but persistently strong underlying inflation pressures could compel the Federal Reserve to resume raising interest rates next month.

Consumer spending edged up 0.1 per cent last month, the Commerce Department said on Friday (Jun 30). Data for April was revised lower to show spending accelerating 0.6 per cent instead of 0.8 per cent as previously reported. Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of US economic activity, rising 0.2 per cent.

Last month’s small gain implies consumer spending moderated in the second quarter after rising at its fastest pace in nearly two years in the January-March period. Nevertheless, the pace is probably still sufficient to help keep the economy expanding. Strong consumer spending accounted for the economy’s 2.0 per cent annualised growth pace last quarter, defying fears of a recession because of the Fed’s hefty rate hikes.

Upbeat May data including job growth, housing starts and orders for long-lasting manufactured goods have led economists to expect that second-quarter gross domestic product growth would be close to the first-quarter pace. The Atlanta Fed is currently estimating GDP increasing at a 1.8 per cent rate this quarter.

Consumer spending remains underpinned by strong wage gains in a tight labour market. But the outlook is less favourable. Most lower-income households are believed to have depleted savings accumulated during the Covid-19 pandemic.

About 26.6 million Americans with federal student loans will start making interest payments in October when a more than three-year moratorium ends. Morgan Stanley estimates that the hit to income at the disposal of households could lower inflation-adjusted consumer spending by about 10 basis points this year and slice off seven basis points from GDP growth.

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The personal consumption expenditures (PCE) price index gained 0.1 per cent in May after rising 0.4 per cent in April. In the 12 months through May, the PCE price index advanced 3.8 per cent after climbing 4.3 per cent in April.

Excluding the volatile food and energy components, the PCE price index gained 0.3 per cent after rising 0.4 per cent in the prior month. The so-called core PCE price index increased 4.6 per cent on a year-on-year basis in May after advancing 4.7 per cent in April. The Fed tracks the PCE price indexes for its 2 per cent inflation target. REUTERS