Americans’ income and spending failed to keep pace with price hikes in May, the latest sign that the fastest rate of inflation in a generation is cutting off the mainstay of the economic recovery.
The Commerce Department said Thursday that consumer spending, adjusted for inflation, fell for the first time this year, down 0.4 percent from April. In addition, spending rose more slowly in the first four months of the year than previously reported, the government said, and after-tax income, adjusted for inflation, fell slightly.
The report provided fresh evidence that the US economy is stuck in a delicate equilibrium as the Federal Reserve attempts to control inflation. Policy makers want to cool down consumer demand for goods and services, which has outpaced supply, driving up prices. But if the central bank aggressively suppresses demand while prices are already reducing consumption, it could cause a recession.
Consumers have barely stopped spending. Public demand remains strong, particularly in terms of vacation travel, restaurant meals and other services many families avoided earlier in the pandemic.
However, many forecasters said Thursday that they now believe that US GDP, adjusted for inflation, contracted in the second quarter. This would be the second straight decline — a common, albeit unofficial, definition of stagnation. Most economists say the US has not yet entered a recession under the more formal definition, which takes into account a variety of economic indicators, but they say the risks are increasing.
Thursday’s data indicated some potential moderation in inflation. The PCE price index, which the Fed officially targets when it aims for an average rate of 2 percent inflation over time, rose 6.3 percent from a year earlier, matching the increase in April. From the previous month, it rose 0.6 percent at a fast pace as gas prices rose.
But the core price index, which strips out volatile food and fuel prices, rose 4.7 percent over the past year, down slightly from 4.9 percent in the previous reading. That core measure is up 0.3 percent from April, about the same as the last few months.
Until recently, there was little evidence that consumers’ bad moods greatly affected their spending. But that may be starting to change. Consumer spending, unadjusted for inflation, rose 0.2 percent in May, the weakest gain this year, and spending on goods fell, as price increases were faster.
In other areas, consumers are spending more but getting less: Households bought roughly the same amount of gasoline in May as in April, for example, but paid 4 percent more for it.
Stories like Mr. Troll’s highlight the risks to the economy if the labor market slows. Despite the decline in May, Americans’ incomes, in general, have mostly kept pace with inflation thanks to higher wages and strong job growth.
The labor market is likely to calm in the coming months, although the Federal Reserve is raising interest rates in an attempt to tame inflation. Weaker wage growth and slower job gains — or worse, outright job losses — would dampen income growth and could push people back.