Americans’ income and spending failed to keep pace with rising prices in May, the latest sign that the fastest inflation in a generation is crumbling the foundations of the economic recovery.
Consumer spending, adjusted for inflation, fell 0.4 percent this year for the first time from April, the Commerce Department said Thursday. In addition, in the first four months of the year, spending rose more slowly than previously reported, the government said, and after-tax income, adjusted for inflation, declined slightly.
The report provided new evidence that the US economy is in delicate equilibrium as the Federal Reserve tries to control inflation. Policymakers want to dampen consumer demand for goods and services that exceed supply, driving prices up. But if the central bank aggressively throttles demand while prices are already depressing consumption, it could trigger a recession.
Consumers have hardly stopped spending. Overall demand remains strong, particularly for leisure travel, restaurant meals and other services that many families avoided earlier in the pandemic.
Still, several forecasters said on Thursday they now believe that inflation-adjusted US gross domestic product contracted in the second quarter. That would be the second consecutive decline — a common, if unofficial, definition of a recession. Most economists say the United States has not yet entered a recession by the more formal definition, which takes into account a variety of economic indicators, but they say risks are mounting.
Data released Thursday pointed to a possible moderation in inflation. The personal consumer spending price index, which the Fed is officially targeting when it targets an average inflation rate of 2 percent over time, rose 6.3 percent from a year earlier, consistent with April’s rise. It rose 0.6 percent from a month earlier, a rapid pace as gas prices rose.
But the core price index, which excludes volatile food and fuel prices, rose 4.7 percent last year, down slightly from 4.9 percent in the previous reading. That core measure rose 0.3 percent from April, roughly the same as in previous months.
Policymakers are “probably sitting there feeling a little relieved” that core price increases are moderating, said Ian Shepherdson, the chief economist at Pantheon Macroeconomics. But inflation remains very high, the outlook depends on variables like the war in Ukraine, and the latest data is unlikely to change the Fed’s course.
“Now is not the time to announce even the hint of a possible victory,” said Mr. Shepherdson.
Inflation takes its toll on consumers’ finances and their economic prospects. Fifty-two percent of American adults say they are financially worse off than they were a year ago, according to a survey for The New York Times conducted June 13-19 by online research platform Momentive. Ninety-two percent say they are concerned about inflation, including 70 percent who say they are ‘very concerned’.
Until recently, there were few signs that consumers’ gloomy moods had much of an impact on their spending. But that may be beginning to change. Consumer spending, unadjusted for inflation, rose 0.2 percent in May, the weakest rise this year, and spending on goods, where price increases have been fastest, declined.
In other areas, consumers spend more but get less: households bought almost exactly the same amount of gasoline in May as they did in April, but paid 4 percent more for it.
Tim Trull recently put $35 worth of gas in his truck on Friday and was empty again after a weekend trip to visit his parents 30 miles away. So he looks for other places to cut back. Trips to the supermarket have become a boring routine: bread, cheese, eggs, milk, whatever lunch meat is available. Mr. Trull said he didn’t even walk the meat aisle anymore.
“I love my Raisin Bran, but I can’t even buy Raisin Bran,” he said. “Raisin Bran now costs almost $7 a box.”
Mr. Trull, 51, got a 50 cents an hour pay increase for Christmas, but inflation has more than wiped that out — especially as the furniture factory he works for in Hickory, NC, has begun to cut back on overtime. With a recession on his way, he’s worried about losing his job.
“I just have some bad feelings that eventually it will water down and they will start firing people again,” he said. “Who is going to buy furniture when you have to decide on gas, food or a new love seat?”
Stories like Mr. Trull’s highlight the risk the economy faces if the labor market slows. Despite the dip in May, American income has broadly remained broadly in line with inflation thanks to rising wages and strong job growth.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
However, the job market is likely to cool in the coming months as the Fed raises interest rates in a bid to tame inflation. Weaker wage growth and slower job growth — or worse, outright job losses — would dent income growth and perhaps make people more reluctant to dive into their savings. That could make a recession more likely.
“If we start to see a slowdown in job growth, if we start to see a slowdown in wage growth, if we start to see an increase in unemployment claims, then I think the story is really starting to shift,” he said. Michelle Meyer, the chief US economist for the Mastercard Economics Institute.
US households have also accumulated trillions of dollars in savings during the pandemic, thanks in part to government support. Those savings could, at least in theory, help consumers to continue spending even if their incomes lag further behind inflation. Households are already saving less to spend: Americans saved 5.4 percent of their after-tax income in May, slightly more than in April, but below about 7 percent in the years before the pandemic.
But families may be reluctant to dig too deep into their rainy days if they’re concerned about a potential recession, said Pablo Villanueva, senior US economist for UBS.
“In recent months, consumers have come to rely more on lower savings rates to finance consumption, and that can only last so long, especially in the context of very weak consumer confidence,” he said.