Consumer Spending Rises in May

Americans' incomes and spending rose strongly last month, but much of the money went to pay higher food and gasoline prices, the government reported today.

The figures did nothing to alter widespread expectations that the Federal Reserve will start raising short-term interest rates Wednesday, to keep inflation under control as the economy continues to expand at a healthy pace.

Fed officials have said they hope to raise rates slowly in the months and perhaps years ahead, to allow financial markets to adjust smoothly and to avoid braking economic growth too much. But they have also made clear that they will raise rates more aggressively if necessary to restrain inflation, which has spurted recently.

Overall consumer inflation jumped in May, but prices remained relatively tame after excluding those for volatile food and energy items, the Commerce Department reported.

Consumer prices climbed 0.5 percent last month, more than double the 0.2 percent pace of April, according to the department's price index. The measure rose 2.5 percent in the 12 months that ended in May, a faster rate of increase than the 2.0 percent rise over the 12 months ended in April.

After excluding food and energy prices, the department's core-personal consumption expenditure index -- a measure favored by the Fed -- rose a very modest 0.2 percent in May, the same rate as in March and April. On a 12-month basis, core-inflation rose by a mild 1.6 percent in May, the same rate as in the preceding month and comfortably within the range preferred by many Fed officials.

Gasoline prices peaked in May, with the national average for a gallon of unleaded regular hitting a record high of $2.05 on May 26 and sliding since then to $1.92 today, according to the AAA automobile club.

Thus overall inflation probably has eased since May as well. Among the questions facing Fed policymakers when they begin their two-day meeting tomorrow is whether energy prices are more likely to tumble further or to shoot up again because of turmoil overseas. Another is how much power businesses have to pass on their energy, labor and other costs to consumers.

Higher prices clearly absorbed a good chunk of consumers' incomes and spending last month, the Commerce Department report showed.

Personal income -- which includes wages, salaries, rents, dividends, interest, government benefits and other sources -- rose 0.6 percent in May, the same seasonally adjusted rate of increase as in April, the report said. But incomes were flat after adjusting for inflation and taxes.

Personal spending climbed by a strong 1 percent last month, on a seasonally adjusted basis. But spending rose at less than half that pace, by 0.4 percent, after adjusting for inflation.

"This spring's surge in gasoline prices has eaten up much of the recent growth in income," Mark Vitner, a senior economist with Wachovia Economics, wrote in a note to clients.

But looking ahead, he said, overall inflation could slow, reflecting recent declines in prices for energy, industrial and agricultural products. That would make it easier for the Fed to stick to its plan of raising its benchmark Federal funds rate at a "measured" pace, which analysts have interpreted to imply raising the rate from its current very low 1 percent level in small quarter-percentage points steps spread out over many months. Traders and analysts widely believe the Fed will raise the rate Wednesday to 1.25 percent, which would mark the first change in a year and the first increase in four years.

"With the economy growing at a more moderate pace and inflation fears subsiding, the Fed will have the green light from the financial markets to take only measured tightening steps in the second half of the year," Vitner said.