U.S. Personal Income and Spending Both Rose 0.7% in May

U.S. personal income and consumption both registered a 0.7% increase in May, exceeding consensus forecasts. Personal income's rise outpaced the anticipated 0.4%, while personal consumption marginally beat the 0.6% expectation, with a revised 0.4% increase when factoring in prior months. Over the past year, personal income has advanced 3.8%, and spending has grown at a faster clip of 6.3%.

Disposable personal income, representing income after taxes, similarly rose 0.7% in May, or 0.8% with revisions, marking a 4.1% increase year-over-year. Inflation, as measured by the overall Personal Consumption Expenditures (PCE) deflator, climbed 0.4% in May, reaching 4.1% compared to a year ago. The "core" PCE deflator, which excludes volatile food and energy components, increased 0.3% for the month and is up 3.4% over the past year. After adjusting for these inflationary pressures, "real" consumption saw a 0.3% rise in May and stands 2.1% higher than a year prior.

The simultaneous jump in both income and consumption in May indicates that spending is more than keeping pace with persistent inflation. A significant contributing factor to income growth was a second round of payments to farm proprietors under the Supplemental Disaster Relief Program, addressing losses from natural disasters in 2023-2024. Private sector wages and salaries advanced 0.4% in May, representing a 4.1% increase annually, effectively keeping pace with inflation. Government transfer payments also rose 0.6% for the month, up 4.6% year-over-year. On the spending front, the 0.7% increase in personal consumption was notably driven by demand in financial services and insurance, healthcare, and housing and utilities. Goods spending, encompassing energy costs, saw a 0.9% jump in May, while services spending increased 0.6%.

The personal saving rate, which measures the proportion of after-tax income not spent, held at 3.0% in May. This rate matches the previous month and represents the lowest level since summer 2022, a level not observed since 2008 prior to that. While a lower saving rate can support current spending, its long-term sustainability is questionable. The inflation outlook has seen a temporary worsening, with PCE prices—the Federal Reserve's preferred inflation metric—rising 0.4% in May, pushing the year-over-year figure to 4.1%, the highest since early 2023. Core PCE prices increased 0.3% in May, with the annual comparison accelerating to 3.4%, a notable increase from the 2.8% pace observed in the twelve months ending May 2025. The Federal Reserve is expected to closely monitor these trends, especially as Middle Eastern geopolitical tensions appear to de-escalate and energy prices have declined in June. The prevailing view is that the Fed will maintain a cautious stance, awaiting clearer signals regarding sustained inflationary pressures.

Key terms

1. **PCE Deflator**: The Personal Consumption Expenditures (PCE) deflator is a key measure of inflation, tracking the average change over time in the prices paid by urban consumers for goods and services. The "core" PCE deflator excludes volatile food and energy prices to provide a clearer picture of underlying inflation trends.

2. **Disposable Personal Income**: This refers to the amount of money that households have available for spending and saving after income taxes have been deducted. It is a crucial indicator of consumers' purchasing power.

3. **Personal Saving Rate**: The personal saving rate is the percentage of disposable personal income that households save rather than spend on consumption during a given period. A lower saving rate indicates that consumers are spending a larger portion of their income.