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June 29, 2018

U.S. core PCE price index hits 2 percent; spending slows

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U.S. core PCE price index hits 2 percent; spending slows
FILE PHOTO: People walk with shopping bags in Manhattan, New York City, U.S. December 27, 2016. REUTERS/Andrew Kelly/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices accelerated in the year to May, with a measure of underlying inflation hitting the Federal Reserve’s 2 percent target for the first time in six years.

The rise in price pressures reported by the Commerce Department on Friday will probably not shift the Fed from its stated path of gradual interest rate increases as policymakers have indicated they would not be too concerned with inflation overshooting its target.

The U.S. central bank raised interest rates early this month for a second time this year and forecast two rate more hikes by the end of 2018. Inflation is pushing higher in part because of a tightening labor market, which is characterized by a 3.8 percent unemployment rate.

Consumer prices as measured by the personal consumption expenditures (PCE) price index rose 0.2 percent after a similar gain in April. In the 12 months through May, the PCE price index surged 2.3 percent. That was the largest rise since March 2012 and followed a 2.0 percent increase in April.

Excluding the volatile food and energy components, the PCE price index advanced 0.2 percent for a sixth straight month.

That lifted the year-on-year increase in the so-called core PCE price index to 2.0 percent, the biggest gain since April 2012. The annual core PCE price index rose 1.8 percent in April. The core PCE index is the Fed’s preferred inflation measure.

U.S. financial markets were little moved by the data as investors kept a wary eye on developments surrounding growing tensions between the United States and its major trade partners. Treasury Secretary Steve Mnuchin on Friday denied a report that President Donald Trump wanted the United States to withdraw from the World Trade Organization.

The dollar slipped against a basket of currencies. Prices for U.S. Treasuries fell while U.S. stock index futures were trading slightly higher.

CONSUMER SPENDING COOLS

Last month’s acceleration in inflation came despite a moderation in consumer spending. The government said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2 percent in May. Data for April was revised down to show spending rising 0.5 percent instead of the previously reported 0.6 percent jump.

Economists polled by Reuters had forecast spending gaining 0.4 percent last month. Spending was held back by a drop in outlays on household utilities. Purchases of long-lasting goods such as motor vehicles edged up 0.1 percent in May.

Nondurable goods purchases increased 0.4 percent, likely reflecting higher gasoline prices. Outlays on services ticked up 0.1 percent. The slowdown in consumer spending last month was also the result of households boosting savings.

When adjusted for inflation, consumer spending was unchanged in May after increasing by a downwardly revised 0.3 percent in the prior month. The so-called real consumer spending was previously reported to have increased 0.4 percent in April.

Last month’s flat reading and the small downward revision to April’s data could see economists trimming their lofty second-quarter estimates for consumer spending. Growth in consumer spending braked to a 0.9 percent annualized rate in the first quarter, the slowest pace in nearly five years, after rising at a 4.0 percent rate in the fourth quarter.

Consumer spending is being supported by the robust labor market and lower income tax rates which came into effect in January. A raft of data, including trade, have suggested a surge in economic growth was under way in the second quarter after hitting a soft patch in the January-March period.

Gross domestic product estimates for the second quarter are as high as a 5.4 percent rate. The economy grew at a 2.0 percent pace in the first three months of the year.

Last month, personal income rose 0.4 percent after gaining 0.2 percent in April. Wages increased 0.3 percent.

Savings rose to $482.0 billion in May from $448.0 billion in the prior month. The saving rate climbed to 3.2 percent from 3.0 percent in April.

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