Inflation took its toll on American consumers in May, as evidenced by the University of Michigan Consumer Sentiment index released Friday. It came in at 59.1, down from 65.2 in April, the lowest number in about a decade thanks to a spike in the cost of living as measured by several indexes.

Consumer expectations for inflation, published by the Federal Reserve Bank of New York early in the week, registered an annual rate of 6.3% for April, easing slightly from 6.6% in March.

The Consumer Price Index (CPI), a measure of inflation at the retail level published by the Bureau of Labor Statistics (BLS) on Wednesday, reached an annual rate of 8.3% in April, slightly below the 8.5% in March. However, core inflation, which excludes the volatile food and energy component from calculations, hit 6.2%, meaning that inflation is spreading beyond food and energy.

The Producer Price Index (PPI), a measure of inflation at the wholesale level published by the BLS on Thursday, came in at 11%, a sign that prices will remain elevated for several months as retailers pass the wholesale price hikes on to consumers.

Rising inflation diminishes the value of incomes, especially at the low end of income distribution. It depresses consumer sentiment and consumer spending.

"Consumers' assessment of their current financial situation relative to a year ago is at its lowest reading since 2013, with 36% of consumers attributing their negative assessment to inflation," reads the Michigan report. "Buying conditions for durables reached its lowest reading since the question began appearing on the monthly surveys in 1978, again primarily due to high prices. The median expected year-ahead inflation rate was 5.4%, little changed over the last three months, and up from 4.6% in May 2021."

Depressed consumer sentiment is a sign that the U.S. economy is slowing down, as consumer spending accounts for close to two-thirds of GDP, which fell in the first quarter of 2022 due to the strong dollar that depressed U.S. trade. A significant drop in consumer spending could push the U.S. economy into a recession by the end of the second quarter. A recession occurs when GDP drops for two consecutive quarters.

However, depressed consumer spending could help ease inflationary pressures, making it easier for the Federal Reserve to bring inflation under control without significant interest-rate hikes.

Wall Street seems to be focusing on the second rather than the first scenario on Friday, sending all major equity averages higher.

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