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May Consumer Spending Growth Sizzles Even as Annual Core Inflation Accelerates

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May Consumer Spending Growth Sizzles Even as Annual Core Inflation Accelerates

US consumer spending rose more than projected in May, while the Federal Reserve's preferred inflation metric accelerated to the fastest reading in more than two years, government data showed Thursday.

Personal consumption expenditures increased 0.7% last month, following a 04% increase the month prior, the Bureau of Economic Analysis said, surpassing the consensus for a 0.6% gain in a Bloomberg-compiled survey. Inflation-adjusted real PCE rose by 0.3% last month after a flat reading in April, while Wall Street expected a 0.2% increase.

Personal income also rose by 0.7% in May, after a flat reading in April, exceeding the 0.4% gain expected by analysts.

"Today's report brought some welcome news on the health of the consumer," Ksenia Bushmeneva, economist at TD Economics, said in a report. "Spending and income both rebounded, marking a clear improvement from the prior month.

The "sizzling" consumer spending growth last month was in line with the strong rise in core retail sales in May, according to Scott Anderson, chief US economist at BMO.

Annual inflation in the US accelerated to 4.1% in May, the fastest print since April 2023, and matching the consensus estimate. It follows a 3.8% gain in April.

Core PCE inflation, which strips out food and energy, accelerated to 3.4%, as expected, from 3.3% in April. That's the highest reading since October 2023.

On a month-on-month basis, inflation held steady at 0.4% in May, slower than the consensus for a 0.5% reading, The core PCE price index was also unchanged at 0.3%, in line with expectations.

"PCE price inflation remains too high and will keep the Fed on hold and mulling a potential rate hike at upcoming meetings," BMO's Anderson said. "On the bright side, a lot of the goods price inflation seemed to be driven by the energy complex, so as energy prices drop this source of inflation pressure should fade."

Last week, the US central bank's Federal Open Market Committee maintained the target range for the federal funds rate at 3.50% to 3.75%, marking its fourth consecutive pause. The Fed policymakers at the same meeting removed the so-called easing bias from the policy statement, while raising interest rate expectations through 2028.

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