US income and spending lag behind inflation, a sign of economic fragility

NEW YORK (NYTIMES) – Americans’ income and spending failed to keep pace with rising prices in May, the latest sign that the fastest inflation in a generation is chipping away at the bedrock of the economic recovery.

Consumer spending, adjusted for inflation, fell for the first time this year, declining 0.4 per cent from April, the Commerce Department said on Thursday (June 30). In addition, spending rose more slowly in the first four months of the year than previously reported, the government said, and after-tax income, adjusted for inflation, fell slightly.

The report offered new evidence that the US economy hangs in a delicate balance as the Federal Reserve tries to bring inflation under control. Policymakers want to cool off consumer demand for goods and services, which has outstripped supply, driving up prices. But if the central bank chokes off demand aggressively when prices are already crimping consumption, it could cause a recession.

Overall demand remains strong, particularly for vacation travel, restaurant meals and other services that many families avoided earlier in the pandemic. Still, several forecasters said Thursday that they now believe US gross domestic product, adjusted for inflation, shrank in the second quarter. That would be the second consecutive decline – a common, though unofficial, definition of a recession.

The personal consumption expenditures price index, which the Fed officially targets when it aims for 2 per cent inflation on average over time, climbed 6.3 per cent from a year earlier, matching the April increase. From a month earlier, it climbed 0.6 per cent, a rapid pace as gas prices rose.

But the core price index, which strips out volatile food and fuel prices, climbed 4.7 per cent over the past year, down from 4.9 per cent in the prior reading. That core measure climbed 0.3 per cent from April, roughly matching the previous few months.

Fifty-two percent of American adults say they are worse off financially than they were a year ago, according to a survey for The New York Times conducted June 13-19 by the online research platform Momentive. Ninety-two percent say they are concerned about inflation, including 70 per cent who say they are “very concerned.”

Consumer spending, not adjusted for inflation, rose 0.2 per cent in May, the weakest gain this year, and spending on goods, where price increases have been fastest, fell.