Written by AP Economics Writer Christopher Ruger
Washington (AP) While Americans also reduced their spending last month, a key inflation indicator increased in May, the most recent indication that prices are still persistently high.
The Commerce Department reported Friday that prices increased 2.3% in May compared to a year ago, up from just 2.1% in April. Core prices increased 2.7% from a year ago, up from 2.6% the month before, excluding the erratic food and energy categories. Both numbers are slightly higher than the 2% target set by the Fed. Since core inflation usually offers a more accurate indication of the direction of inflation, the Fed monitors it.
Meanwhile, overall spending declined 0.1%, and Americans reduced their spending for the first time since January. Earnings fell by a steep 0.4%. One-time adjustments skewed both numbers: Americans had acted faster to purchase cars in the spring to avoid tariffs, which caused expenditure on cars to plummet and overall spending to decline.
Additionally, after Social Security benefits were increased in March and April due to a one-time adjustment, incomes decreased. Some retirees who had worked for municipal and state governments saw an increase in their Social Security benefits.
However, the data indicates that growth is slowing as Americans cut back on their spending, partly due to the fact that President Donald Trump’s tariffs have increased the price of several products, like audio equipment, tools, and appliances. This year, consumer sentiment has also declined significantly as a result of the duties’ somewhat disorganized implementation. Additionally, hiring has been slow, making it difficult for jobless people to obtain new employment while the unemployment rate is still low.
The first three months of this year saw a meager 0.5% increase in consumer spending, and the first two months of the second quarter have seen slow growth as well.
According to Luke Tilley, chief economist of Wilmington Trust, consumers are spending less on travel, leisure, lodging, and other such expenses because they are not in a strong enough position to bear those (higher) prices.
According to Friday’s study, spending on hotels, restaurants, and airfares all decreased last month.
However, the data indicates that the impact of President Donald Trump’s taxes on foreign goods is still quite small in relation to overall pricing. Falling prices for new automobiles, airline tickets, and apartment rentals, among other things, have partially countered the rising costs of some goods.
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In actuality, monthly inflation was rather mild. According to the Commerce Department, prices increased by just 0.1% in May compared to April. Core prices increased by 0.2% in May, which was higher than the 0.1% increase previous month and more than economists had predicted. Just between April and May, gas prices dropped 2.6%.
Trump’s tariffs have not yet increased inflation as many analysts had predicted, according to economists for a number of reasons. Many of the things on store shelves today were imported without paying higher levies, and businesses, like American customers, imported billions of dollars’ worth of goods in the spring before the penalties went into effect.
There are preliminary signs that things are starting to change.
Nike said this week that it anticipates spending $1 billion this year as a result of U.S. tariffs. In the fall, it will start raising the cost of surgery. It’s not the first retailer to warn about price increases as classes resume.
Walmart announced last month that as back-to-school shopping ramps up, its customers would begin to see rising pricing this month and next.
Additionally, raw materials and components used to manufacture items in the United States make up a large portion of what the country imports. It may take some time for consumer pricing to reflect those increased input costs. According to JPMorgan economists, many businesses are currently bearing the cost of the tariffs. Their profit margins may be lowered as a result, which may make hiring more difficult.
The Federal Reserve and its chairman, Jerome Powell, are under increased scrutiny as a result of declining inflation. In order to slow the economy and fight inflation, which surged to a four-decade high almost three years ago, the Fed raised its short-term interest rate in 2022 and 2023. The Fed may lower its rate to a level that doesn’t hinder or encourage growth, according to some economists and Fed officials, since price hikes are now almost back to the Fed’s aim.
Trump has also called Powell an idiot and a numskull on numerous occasions for not lowering interest rates.
Powell, meanwhile, stated earlier this week in congressional testimony that the Fed wants to wait for the economy and inflation to stabilize before lowering interest rates. The majority of other Fed policymakers have voiced a similar opinion.
