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

U.S. personal income and consumption expenditures both increased by 0.7% in May, exceeding consensus estimates. Personal income growth of 0.7% significantly beat the anticipated 0.4%, while personal consumption’s 0.7% rise (0.4% with revisions) narrowly surpassed the projected 0.6%. Over the past year, personal income has risen 3.8%, with spending up 6.3%. This robust growth indicates continued consumer activity despite persistent inflationary pressures.

Disposable personal income, representing income after taxes, also saw a 0.7% increase in May (0.8% including revisions), marking a 4.1% rise from the previous year. The overall Personal Consumption Expenditures (PCE) deflator, a key inflation gauge, advanced 0.4% in May, bringing its year-over-year increase to 4.1%. The core PCE deflator, which excludes volatile food and energy components, increased 0.3% in May, settling at a 3.4% annual growth rate. After adjusting for inflation, real consumption saw a 0.3% gain in May, representing a 2.1% increase over the past year.

Both income and consumption demonstrated strong upward movement in May, outpacing the current inflationary environment. A significant contributor to the income surge was a second round of payments to farm proprietors under the Supplemental Disaster Relief Program. Private sector wages and salaries advanced 0.4% for the month, up 4.1% annually, effectively keeping pace with inflation and maintaining purchasing power. Government transfer payments also contributed, rising 0.6% in May and 4.6% over the year. On the spending side, the 0.7% increase in personal consumption was primarily driven by higher expenditures in financial services, insurance, healthcare, and housing & utilities. Goods spending, including energy costs, saw a collective jump of 0.9% in May, while spending on services grew by 0.6%.

The personal saving rate remained at 3.0% in May, matching the previous month's figure and tying for the lowest level since mid-2022. This low saving rate, last observed in 2008, facilitates current spending but raises questions about long-term sustainability. The inflation outlook has seen a temporary deterioration. The PCE price index, the Federal Reserve's preferred inflation metric, increased 0.4% in May, with the year-over-year rate climbing to 4.1%, the highest since early 2023. Core PCE prices, excluding food and energy, rose 0.3% in May, pushing the annual comparison to 3.4%, a notable acceleration from the 2.8% recorded for the twelve months ending May 2025. This data will be closely scrutinized by the Federal Reserve as it assesses appropriate monetary policy responses, particularly given recent geopolitical developments and their potential impact on energy prices.

Key terms:

1. **Personal Consumption Expenditures (PCE) Deflator**: A measure of inflation that tracks the average change in prices for all goods and services purchased by consumers. It is the Federal Reserve's preferred inflation gauge.

2. **Core PCE Deflator**: The PCE deflator excluding food and energy prices, which are often volatile. Economists use the core PCE to get a clearer picture of underlying inflation trends.

3. **Personal Saving Rate**: The percentage of disposable personal income that is not spent on consumption. It indicates the proportion of after-tax income that households are saving.