According to data released Friday by the Commerce Department , personal consumption expenditures (PCE) rose 0.5% in May , following a 0.4% gain in April. The increase was driven largely by a rise in spending on travel, dining, healthcare services, and durable goods, including autos and home appliances. At the same time, the core PCE price index , the Federal Reserve’s preferred inflation gauge, rose 0.3% month-over-month and 3.1% year-over-year — still well above the Fed’s 2% target.
Households Still Spending, But at a Cost
Despite widespread concerns about the cumulative effects of two years of monetary tightening, households continue to spend at a pace that defies historical expectations for this stage of the rate cycle. Economists attribute the continued momentum to strong wage growth, pandemic-era savings, and a still-tight labor market.
“Consumers remain remarkably resilient,” said Rachel Fineman, senior economist at Stratton Global. “We’re seeing continued demand in discretionary categories, especially services — even as inflation remains a concern.”
Spending on travel and leisure services jumped 1.2% in May, while restaurant and bar sales climbed 0.8%. Goods spending rose more modestly at 0.3%, but still beat consensus forecasts. Yet that strength is not without consequence. The personal savings rate dropped to 3.4% , the lowest level since November 2023, suggesting that households may be dipping further into reserves or leaning on credit.
Inflation Progress Slows — Again
While headline inflation has cooled from its 2022 peak, progress toward the Fed’s 2% target has stalled in recent months. The core PCE index — which strips out volatile food and energy — remains stuck above 3%, raising fresh questions about how quickly inflation can be tamed without a more significant economic slowdown.
“Sticky inflation, particularly in services, is the Fed’s biggest concern,” said Jordan Malik, portfolio manager at Ardent Capital. “We’re past the easy part of disinflation. The next leg down is going to be harder — and slower.”
Rent, healthcare services, and insurance premiums were among the key contributors to May’s price gains, with little evidence that price pressures in these sectors are abating quickly.
What It Means for the Fed
The strong consumer spending data complicates the Federal Reserve’s path forward. While the Fed held interest rates steady at its June 3 meeting, Chair Jerome Powell made it clear that policymakers are still highly data-dependent and cautious about declaring inflation under control.
“Consumer strength is both a blessing and a challenge for the Fed,” said Fineman.“It supports growth but risks reigniting inflation pressures if wage gains continue to outpace productivity.”
Markets are currently pricing in the first potential rate cut in September , but Friday’s data has narrowed the odds, with many analysts now predicting the Fed may opt to delay easing until year-end unless inflation trends lower in the next two CPI reports.
Markets React With Caution
The S&P 500 closed flat on Friday, while the Nasdaq Composite inched up 0.3% , buoyed by gains in tech and consumer discretionary stocks. Bond markets saw mild selling, with the 10-year Treasury yield rising to 4.55% , reflecting renewed uncertainty over the Fed’s policy path. Gold prices held steady near $3,010 per ounce , while oil prices climbed slightly on expectations that robust consumer demand will support fuel usage heading into the summer travel season.
Consumers Power the Economy — For Now
The U.S. economy remains heavily reliant on consumer activity, which accounts for nearly 70% of GDP . While the May data suggests momentum remains strong heading into the summer, there are signs that the spending boom could slow later in the year. Credit card balances have been rising for five consecutive months, and delinquencies — while still below pre-pandemic levels — are beginning to tick higher, particularly among younger borrowers and households earning under $50,000 annually.
“It’s a powerful but fragile engine,” said Malik. “If inflation stays elevated and borrowing costs remain high, something will have to give — either spending, savings, or financial stability.”
For now, however, consumers appear undeterred — a key reason why analysts continue to revise up their second-quarter GDP growth forecasts, now hovering around 2.1% annualized .
