Consumer Spending Declines in May

Washington, DC, June 27, 2025-U.S. household income and spending both declined in May, signaling a potential cooling in consumer momentum, even as core inflation remained slightly elevated, complicating the outlook for Federal Reserve rate cuts. 

In May, personal income declined by 0.4%-a fall of approximately $109.6 billion, according to new data released Friday by the Department of Commerce. Disposable personal income (after taxes) dropped even more sharply, down 0.6% (about $125 billion). The decline was driven by decreases in government transfer payments and farm income.

Reflecting this decline, consumer spending fell by 0.1% (around $29.3 billion)-the first drop in spending recorded this year. These decreases in income and spending suggest a pullback in household financial flow for the month.

On the inflation front, headline personal consumption expenditures (PCE) inflation remained subdued, rising just 0.1% month over month and 2.3% year over year. However, the core PCE inflation (excluding food and energy) came in slightly hotter than expected at 0.2% monthly and 2.7% annually, modestly above consensus forecasts.

A dip in both income and spending raises concerns about consumer resilience, while slightly elevated core inflation may complicate the Federal Reserve’s efforts to move forward with interest rate cuts. Market expectations for rate reductions remain steady, with forecasts anticipating two quarter-point cuts later this year-but any moves will likely hinge on upcoming economic data.