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Despite inflation and rising interest rates, the U.S. economy is still strong

STEVE INSKEEP, HOST:

Inflation eased a bit last month, although prices are still climbing more quickly than most people would like. Despite inflation and despite rising interest rates, the U.S. economy is still strong. It grew more quickly than we thought in the first few months of the year. And one big reason is that people have continued spending money. NPR's Scott Horsley has been talking with people about that. Scott, good morning.

SCOTT HORSLEY, BYLINE: Good morning, Steve.

INSKEEP: OK. So personal spending is the biggest driver of the U.S. economy. So how's the driver feeling behind the wheel?

HORSLEY: You know, spending has held up surprisingly well despite inflation and concerns about a possible recession on the horizon. Yesterday, the Commerce Department reported that personal spending jumped at an annual rate of more than 4% in the first three months of the year. That was the sharpest increase since the spring of 2021, back when we were just starting to get widespread vaccinations. We know that spending took another big jump in April, but this morning we learned that spending rose only a little bit in May. So people are making some adjustments. I talked with Claudine Marcantonio, who's an academic advisor at Brooklyn College. Her husband manages a swimming pool. She says they have noticed price breaks on some items, but their overall grocery bill is still pretty high.

CLAUDINE MARCANTONIO: I have noticed that prices for certain things have been going down. Like, eggs was really high for some time. A lot of different things were really high. And I've noticed that it's been coming down, but I'm definitely still paying a good amount. But I have to feed my family, so...

HORSLEY: According to the Commerce Department's inflation yardstick, overall prices were up 3.8% in May from a year ago.

INSKEEP: OK.

HORSLEY: That's a smaller increase than in April. But so-called core inflation, which is closely watched by the Federal Reserve, is still pretty sticky. It was 4.6% in May, down just very slightly from the month before.

INSKEEP: Are people's incomes growing rapidly enough to keep up with that amount of inflation?

HORSLEY: You know, income did grow faster than spending last month, which is good. So people were able to sock away a little more money. But that is not always the case. In April, for example, spending increased twice as fast as income. Like many people, Marcantonio says she's relying more on credit cards now just to cover daily expenses.

MARCANTONIO: Now I'm back to using my credit cards for, like, basic things, and it's a little bit uncomfortable when that happens. I don't want it to get out of hand.

HORSLEY: Credit card debt has been on the rise in recent months. And with today's interest rates, that debt is expensive. According to the bank rate, the average interest rate on credit cards is now above 20%...

INSKEEP: Wow.

HORSLEY: ...Which is an all-time high.

INSKEEP: Are people cutting costs?

HORSLEY: Yeah. You know, two years into this period of rising prices, people have been finding ways to save money. Maybe they're shopping more at discount stores. Some folks are juggling their streaming services, you know, dropping one or two when they're in between TV seasons. Marcantonio says she tries to avoid what she calls frivolous expenses, like getting her nails done. But she did decide to splurge this weekend on a family trip home to Jamaica, where she's celebrating her 40th birthday.

MARCANTONIO: This is going to be the first time that my daughter will be there. And since things are getting a little better with COVID, I wanted to make that trip. But everything's charged just because it was just so expensive.

HORSLEY: Overall, people spent less money on stuff in May but more on services, including travel. But people are still spending, and that's a big reason the economy keeps humming along for now.

INSKEEP: Well, Scott, get out there and make some good purchases, OK?

HORSLEY: Thanks, Steve.

INSKEEP: NPR's Scott Horsley. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Steve Inskeep is a host of NPR's Morning Edition, as well as NPR's morning news podcast Up First.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.