May prices rose faster than pay or spending

American households stepped up their spending in May. But prices rose even faster.

Consumer spending increased 0.2% last month, the Commerce Department said Thursday. But adjusted for inflation, spending fell 0.4% — the first decline this year, and the latest sign that rapidly rising prices, particularly for essentials like food and gas, are chipping away at the bedrock of the economic recovery.

Sky-high gas prices, a tumbling stock market and mounting talk of a possible recession have put consumers in a dour mood. But the problem for the economy is not their willingness to open their wallets. Nominal — not inflation-adjusted — spending has risen steadily all year, particularly for vacation travel, restaurant meals and other services that many families avoided earlier in the pandemic.

The problem is that because of inflation, Americans are spending more but getting less.

Most forecasters still expect inflation-adjusted spending to increase in the second quarter as a whole and to keep rising in the second half of the year. But any sustained slowdown is likely to increase concerns that the economy is slipping into a recession. On Wednesday, a separate report from the Commerce Department showed that consumer spending rose more slowly in early 2022 than previously believed.

Still, consumers have mostly been able to overcome rising prices because their incomes — at least in the aggregate — have also been rising as the strong job market has pushed up wages and allowed more people to return to work. After-tax income rose 0.5% in May, nearly as fast as consumer prices, which were up 0.6%.