The US economic engine has slowed down in May, with consumer spending declining for the first time since January, according to new data released by the Commerce Department. Despite this, inflation remains high on an annual basis.
Consumer spending fell 0.1% last month after rising 0.2% in April. The decline was driven by a significant drop-off in motor vehicle sales, which plummeted nearly 50%. This decrease was largely due to consumers rushing to buy cars in March and April, fearing that President Trump’s tariffs would increase costs.
However, the report also showed that consumers reduced spending at restaurants and hotels. Consumer spending accounts for more than two-thirds of US economic activity, leaving economists concerned that steep tariffs on imported goods will erode American resilience.
Inflation rose 0.1% on a monthly basis, with the Personal Consumption Expenditures price index reaching 2.3% over the past 12 months. This is above expectations of a 0.1% increase from April.
Economists believe that the impact of tariffs will continue to be felt in the coming months. Despite initial delays and adjustments by businesses, higher prices are expected to hit as pre-tariff inventories deplete.
The Federal Reserve has expressed caution over the economic outlook, with forecasts suggesting a continued slowdown in labor market conditions. The June jobs report, due out next week, is expected to show job gains slowing to 125,000 and an unemployment rate potentially rising to 4.3%.
Personal income fell more than expected for the month, sinking 0.4%. However, this decline was largely driven by Social Security payments returning to typical levels. Economists warn that real disposable income growth remains subdued, with forecasts suggesting a pace of 1.7% year over year.
As consumer spending grows closer to 1%, the US economy becomes increasingly vulnerable to shocks such as price increases and interest rate changes. Economists caution that consumers are ill-equipped to weather economic storms due to rising debt levels and dwindling savings.
Source: https://edition.cnn.com/2025/06/27/economy/us-pce-consumer-spending-inflation-may