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Economic Report: Consumer spending slows sharply as inflation hits home

The numbers: Americans increased spending in May by just 0.2% — the smallest increase in 2022 — as high inflation made them more cautious about what they buy and how much.

Economists polled by The Wall Street Journal had forecast a 0.4% increase.

Higher prices due to inflation is making consumers think twice. A key measure of inflation included in the report rose by 0.6% in May, government figures showed.

Incomes rose a somewhat stronger 0.5% in May, but inflation is still rising faster than wages and leaving most Americans worse off financially.

Big picture:  The fate of the economy over the next year will be dictated by consumers. If they keep spending at relatively robust levels despite high inflation and rising interest rates, businesses are unlikely resort to mass layoffs and trigger a recession.

But if consumers hunker down and reduce spending, as they did in May, the economy could be in trouble.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.27%

and S&P 500
SPX,
-0.07%

were set to fall sharply in Thursday trades, as a recent rally loses steam.

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