Americans' incomes and spending rose strongly last month, but much of the money went to pay higher food and gasoline prices, the government reported yesterday.
Consumer prices climbed 0.5 percent in May, more than double the 0.2 percent pace of April, according to a report by the Commerce Department. The measure rose 2.5 percent in the 12 months ended in May, a faster rate of increase than the 2.0 percent rise over the 12 months ended in April.
But after excluding food and energy prices, the department's core personal consumption expenditure index -- a measure favored by the Federal Reserve -- 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.
The latest figures did nothing to alter widespread expectations that the Federal Reserve will decide tomorrow to start raising short-term interest rates to keep inflation under control as the economy expands 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 also have made clear that they will raise rates more aggressively if necessary to restrain inflation.
"With the economy back on a strong growth path, inflation is becoming more of a concern, but is nowhere near at a dangerous level," Joe Liro, of Stone & McCarthy Research Associates, wrote in a note to clients yesterday.
Gasoline prices peaked in May, with the national average for a gallon of unleaded regular gasoline hitting a high of $2.05 on May 26 and sliding to $1.92 yesterday, according to AAA.
Thus, overall inflation may have eased since May as well, economists say. Among the questions facing Fed policymakers as they begin a two-day meeting today 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.
Some Fed officials have said in recent weeks that they were surprised by the recent uptick in inflation. But Chairman Alan Greenspan said in a Senate Banking Committee hearing two weeks ago that the policymakers' "general view is that inflationary pressures are not likely to be a serious concern in the period ahead."
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 Corp., 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 mean raising the rate from its current very low 1 percent level in quarter-percentage-point steps spread out over many months.
Traders and analysts think the Fed will decide tomorrow to raise its target for the federal funds rate, the rate charged between banks on overnight loans, to 1.25 percent, which would mark the first change in a year and the first increase in four years. Other interest rates determined by financial markets, such as those on mortgages and other types of household and business loans, have moved up in recent months in anticipation of the Fed's action.
"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.