Inflation in the United States remains persistent, based on the latest out-turn, which has seen inflation-adjusted spending rising by its highest in three months

Data from the US Commerce Department today (May 26) shows that inflation and consumer spending accelerated last month with the personal consumption expenditures price index and a core measure that excludes food and energy, the Federal Reserve’s preferred inflation gauges rising to the extent that both exceeded projections.

The Commerce Department data reveals the strongest gain in household spending since the start of the year.

Combined with other economic data revealed today, the Commerce Department is highlighting a surge in business equipment orders and a pickup in merchandise imports with the data indicating demand continues to power ahead.

Consumer spending, adjusted for prices, increased 0.5 per cent, the strongest advance since the start of the year as outlays for goods and services picked up.

Feds heading to further rate increase

While the pace of inflation has moderated since peaking a year ago, resilient household demand and steady business investment risk keeping price pressures elevated.

This is the current challenge facing Fed officials, as they debate whether to pause their rate-hike campaign and assess implications of tighter policy on the banking system and economy more broadly.

However, the steady price pressures and demand will keep Federal Reserve policy makers tilted toward raising interest rates further. Based on the latest economic data, traders are betting on a Fed rate hike next month and now see such a move as more likely than a pause.

Price pressures are showing few signs of abating quickly, and a strong jobs market continues to give Americans the financial wherewithal to keep spending. However, any persistence of inflation in the service sector, in part due to strong wage growth in those industries, risks keeping price growth above the Fed’s two per cent target for the foreseeable future.

Inflation measures

A so-called super core inflation measure closely monitored by the Federal Reserve — the cost of services excluding housing and energy increased 0.4 per cent in April, the biggest month-over-month advance since the start of the year, according to Bloomberg calculations. Fed chair Jerome Powell has emphasised the importance of looking at such a figure to gauge the outlook for inflation. On a year-over-year basis, the metric rose 4.6%.

On the spending side, the Commerce Department report suggests the economy got off to a solid start in the second quarter. On an inflation-adjusted basis, outlays for goods rose 0.8 per cent, the most since January and reflecting stronger purchases of autos and pharmaceuticals.

Outlays for services increased 0.3 per cent, also the biggest gain in three months and led by financial services and insurance as well as health care. At the same time, inflation-adjusted disposable income, the main support to consumer spending, was unchanged after 0.2 per cent increases in the prior two months.

In another sign of robust domestic demand, the US merchandise-trade deficit grew in April to US$96.8 billion, the widest since October and above all estimates. Imports increased 1.8 per cent, while exports dropped. The data aren’t adjusted for inflation.