Larger Paychecks Fuel June Spending Spree

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Flush with larger paychecks, U.S. consumers upped their spending in June, especially on experiences that got them out of the house.

Key Takeaways

  • As summer started and restrictions on businesses loosened, consumer spending increased in June, particularly on services.
  • Average income rose due to a jump in wages.
  • One thing that could stop the party: higher prices. The Federal Reserve’s preferred measure of inflation had its largest year-over-year increase since 1991.

Personal spending increased 1% in June, according to a monthly report released Friday by the Bureau of Economic Analysis, a surprise after the slight decline in spending seen in May. As summer started and restrictions on businesses loosened, consumers spent 1.2% more on services in June than in May, above the pre-lockdown peak. Spending on goods increased 0.5% in June after falling 2.1% in May.

The overall jump in spending came despite the fading effect of government relief programs, as fewer people collected unemployment benefits and stimulus payments. Instead, people got raises at work. Wages and salaries rose 0.8% in June—the fourth straight month paychecks have increased. 

June’s numbers reflect a continued shift, economists said, from buying things to enjoying experiences. The preference for activities like dining out, recreation, and travel has powered the U.S. economy to rapid growth, helping boost GDP by 6.5% in the second quarter. The rise in wages, meanwhile, reflects a position of strength currently enjoyed by workers, as businesses attempt to attract staff with fatter paychecks and perks.

One thing that could derail the optimism—and the economy—is inflation. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditure price index excluding food and energy, slightly accelerated last month, rising to 3.5% year-over-year in June from 3.4% in May—the largest year-over-year increase since 1991. On a month-to-month basis, core prices rose 0.4% from the month before, a deceleration from the 0.5% increase seen in May.

Federal Reserve chair Jerome Powell acknowledged this week that we’re experiencing faster inflation, but reiterated the Fed’s previously stated view that the higher prices are temporary side effects of the economy’s reopening. He maintained that inflation will ease once supply-and-demand mismatches resulting from the lockdown resolve themselves. 

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