U.S. Consumer Spending Up 0.1% in May -- 2nd Update

Inflation eased for the third consecutive month and consumer spending was tepid in May, potential complications for the Federal Reserve as it charts a course for interest rates.

The Fed's preferred measure of inflation, the price index for personal-consumption expenditures, rose 1.4% in May from a year earlier, the lowest level in six months, the Commerce Department said Friday. Excluding the often-volatile categories of food and energy, so-called core prices were also up 1.4%, the lowest level since December 2015.

The Fed, tasked with promoting full employment and stable prices, targets a 2% annual inflation rate. The price index poked above that threshold in February for the first time in nearly five years but has settled lower each month since.

"Although the real economy is doing well, Fed officials are concerned that isn't translating into stronger inflationary pressures," Paul Ashworth, chief U.S. economist at Capital Economics, said in a note to clients.

Despite soft readings, the Fed's policy-making committee earlier this month decided to raise its benchmark interest rate by a quarter percentage point and penciled in one more increase for later this year.

Fed Chairwoman Janet Yellen said the weak inflation numbers largely reflect temporary factors, such as falling prices on cellphone plans, and smaller-than-normal rises for drug prices.

"With employment near its maximum sustainable level and the labor market continuing to strengthen, the committee still expects inflation to move up and stabilize around 2% over the next couple of years," Ms. Yellen said.

The unemployment rate was 4.3% in May, the lowest level in 16 years.

Not all Fed officials expect a tight labor market to spur inflation. Earlier this week, St. Louis Fed President James Bullard said policy makers don't need to continue steadily raising rates amid modest economic growth and tame prices.

"Low unemployment readings are probably not an indicator of meaningfully higher inflation over the forecast horizon," Mr. Bullard said Thursday.

On a monthly basis, the price index fell 0.1% in May from April. Core prices were up 0.1%.

Outside of inflation, the economy appears to be advancing at a steady if unspectacular pace.

Personal-consumption expenditures, a measure of household spending on everything from new cars to medical care, increased a seasonally adjusted 0.1% in May from the prior month, the Commerce report said. The measure had risen 0.4% the prior two months.

Instead of splashing out, Americans saved more, boosting the personal-saving rate to 5.5%, its highest level in eight months.

"Americans are in good shape to increase consumption -- the question is when?" Eugenio Alemán, senior economist at Wells Fargo, said in a note to clients.

Consumer confidence in the economy has been relatively high since Donald Trump won the presidential election, though it has moderated in recent months. The University of Michigan on Friday said its consumer-sentiment index was 95.1 in June, down from 97.1 in May and a near-term peak of 98.5 in January.

Personal income, a measure that includes wages, government assistance and other sources, climbed 0.4% from April, buoyed by a big jump in dividend payments. Wage growth was only 0.1%.

Write to Jeffrey Sparshott at jeffrey.sparshott@wsj.com

(END) Dow Jones Newswires

June 30, 2017 12:54 ET (16:54 GMT)