In an unexpected turn, consumer spending in the United States slipped in May, attributed to the waning boost from earlier purchases of automobiles and other goods in response to tariffs, while monthly inflation rates remain mild.
The Bureau of Economic Analysis in the U.S. Department of Commerce reported on Friday (June 27) that consumer spending, which accounts for over two-thirds of economic activity, declined by 0.1% last month, compared to an unrevised growth of 0.2% in April. Economists surveyed by Reuters had predicted a slight 0.1% increase in consumer spending.
President Trump’s broad tariff measures have led to businesses and households importing and purchasing goods ahead of time to avoid price hikes resulting from tariffs, complicating the economic outlook. Some economists have warned that the distortions brought by tariffs may take time to fade from the data.
The surge in imports contributed to a record merchandise trade deficit in the first quarter, which accounted for a significant portion of the annualized GDP growth rate decline of 0.5% for that quarter.
Consumer spending nearly stagnated in the previous quarter as well, with prior household purchases of goods driving spending growth. Spending on services also decreased, causing consumer spending to grow by only 0.5%, marking the slowest growth since the second quarter of 2020.
These data may indicate a slowdown in spending growth in the second quarter.
The combination of weak consumer spending and inflation is unlikely to prompt the Federal Reserve to resume interest rate cuts in July. Federal Reserve Chairman Jerome Powell stated this week before Congress that the central bank needs more time to assess the impact of tariffs on prices before considering rate cuts.
Some economists believe that the moderate inflation is due to businesses still selling off inventory built up before the implementation of tariffs. They anticipate inflation to start rising, initially reflected in the June consumer price data.
The Bureau of Economic Analysis (BEA) reported that the Personal Consumption Expenditures (PCE) price index increased by 0.1% in May compared to the previous month, remaining stable from April. Over the 12 months ending in May, the PCE inflation rate rose by 0.2% compared to the previous month’s 0.1%.
Excluding volatile food and energy components, the core PCE price index rose by 0.2% last month. The core PCE inflation rate in April was 0.1%.
Over the 12 months ending in April, the core inflation rate increased by 2.7% compared to the same period last year, with a 2.6% rise in April. The Federal Reserve uses the PCE price index as a reference for its 2% inflation target. The central bank maintained its benchmark overnight interest rate within the range of 4.25%-4.50% last week, a rate that has remained unchanged since December of last year.