U.S. consumer spending rose at a modest rate in May while inflation fell slightly, according to the latest figures from the Commerce Department. In the eyes of some economists, the consumer spending number strengthens the idea that economic activity is slowly but steadily increasing and could lead the Federal Reserve to increase interest rates by year’s end, Reuters reports.
The Commerce report said consumer spending rose 0.1% last month, after rising 0.4% in April.
“It still looks like real consumption picked up lately,” Daniel Silver, an economist at JPMorgan, told Reuters.
Consumer spending accounts for a big chunk — 70% economists say — of economic activity in the United States and is a key driver of overall growth.
Inflation readings, however, would argue against any near-term increase in the federal funds rate. Inflation, represented by the personal consumption expenditures price index, fell 0.1% in May. Excluding the volatile food and energy categories, the PCE price index rose 0.1%. Year over year, the key measure watched by the Fed, the PCE price index rose 1.4%, 600 basis points below what the Fed considers its target rate of inflation.
Earlier this month, the Fed’s policy-making committee decided to raise its benchmark interest rate by a quarter percentage point and signaled there would be one more increase later this year.
“With employment near its maximum sustainable level and the labor market continuing to strengthen, the committee still expects inflation to move up and stabilize around 2% over the next couple of years,” Fed Chairwoman Janet Yellen said.
But Yellen’s colleagues do not necessarily share her views. James Bullard, the president of the St. Louis Federal Reserve, has said rates might not need to be raised continuously, given modest grow and tepid price increases, according to Morningstar.
President Trump has promised to push economic growth past 3%, but many economists are skeptical. The economy grew at an annual rate of 1.4% for the first three months of the year.
The slowdown in inflation the past two quarters gave a boost to the spending power of consumers, but they seem to have saved those gains rather than spent them. The personal savings rate for May was 5.5%, the highest level in eight months, Morningstar said.
Meanwhile, the University of Michigan’s consumer sentiment index fell to 95.1 this month, its lowest level since November.