- Personal income rose 0.4% in May, slightly ahead of consensus expectations for a 0.3% gain. Removing taxes and price changes, real disposable personal income was up a robust 0.6% in the month.
- Personal spending was softer, rising just 0.1%, in line with the consensus. In real terms, personal spending was also up 0.1%, led by a 0.2% increase in non-durable goods. Durable goods spending edged down 0.1%, while services spending inched ahead 0.1%.
- Consumer prices fell 0.1% (month-on-month) in May, bringing the year-on-year inflation rate to just 1.4% (from 1.7% in April). Core prices (excluding food & energy) also rose 0.1% month-on-month – bringing year-on-year core price growth to 1.4% (from 1.5% previously).
- The personal saving rate jumped to 5.5% from a downwardly revised 5.1% in April.
Key Implications
- Spending was a touch soft in May, but follows two months of solid gains. For the quarter, we are still tracking 3% (annualized) growth, marking a return to form for consumer spending growth and lifting overall economic growth back above trend.
- The upside of weak inflation is strong real income growth. Real disposable personal income has risen a whopping 4.7% (annualized) over the past three months, the strongest growth in nearly two years. This should continue to underpin healthy consumer spending through the second half of the year.
- The Federal Reserve lowered its outlook for inflation in 2017 in its last Summary of Economic Projections in June. Even this relatively quiescent forecast is at risk of underperforming given the continued deceleration in inflation. While global central banks have turned increasingly hawkish in recent weeks, ongoing misses on the inflation front remain the main risk to the pace of monetary policy normalization.
