Jun 30, 2023 - Economy

Fed's preferred inflation gauge cools alongside consumer spending slowdown

Shoppers crossing a street holding shopping bags

Shoppers in Union Square in San Francisco, Calif. Photo: David Paul Morris/Bloomberg via Getty Images

Some heat came off the U.S. economy in May, government data released on Friday showed: Consumer spending slowed, while a key inflation measure cooled.

By the numbers: The personal consumption expenditures price index, the Federal Reserve's preferred measure of inflation, increased 3.8% from the same month a year ago — the lowest annual change in two years, and down from 4.3% registered the prior month.

  • On a monthly basis, the index rose more slowly. In May it rose 0.1%, compared to 0.4% in the prior month.
  • That means personal income, taking inflation into account, rose 0.3% (after a 0.1% decline in April).

Yes, but: The Core PCE price index, which excludes energy and food prices, barely budged — continuing a monthslong trend that signals price gains remain sticky across the economy.

  • This measure rose 4.6% compared to the same month a year ago, down a tick from 4.7% in April.
  • It rose 0.3% in May, slowing slightly from the 0.4% the prior month.

The big picture: The data also showed that consumers slowed spending last month, rising just 0.1%, down notably from the 0.6% pace in April.

  • Consumers continued to splurge on services, with the biggest increases in spending coming from health care and travel. Meanwhile, they slowed purchases of goods like cars and trucks.
  • Adjusted for inflation, consumer spending was flat in May (versus a 0.2% gain the prior month).
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