The Bureau of Economic Analysis published key May statistics in its Personal Income and Outlays report. Here are the key highlights.
Persistent inflation—driven by energy shocks, rising technology costs, and strong consumer spending—keeps the Federal Reserve on alert, even as oil prices begin to ease. In May, both the 12-month and core Personal Consumption Expenditures (PCE) indexes, the Fed’s preferred inflation metrics, rose for the fourth consecutive month, a trend that began with the outbreak of the war with Iran. Overall prices jumped by 4.1%, marking the largest monthly gain since April 2023. Meanwhile, the core index, which excludes food and energy prices, rose by 3.3%, its highest increase since October 2023, significantly exceeding the Fed’s 2% target.
A recent decrease in oil and gasoline prices — following the US–Iran peace agreement — should ease inflationary pressures. However, gasoline prices remain nearly a dollar per gallon above pre-conflict levels, according to the AAA. In addition, the core index’s fourth consecutive monthly rise indicates that inflation is widespread and not solely driven by oil prices. The increasing integration of artificial intelligence (AI) into products and services has spurred demand for semiconductors, driving sharp increases in chip and computer equipment prices. Since chips are integral to many household goods and services, higher chip and software costs have significantly contributed to inflation. Economists caution that higher production costs from the prior oil spike and chip prices will continue to filter through the economy, keeping inflation elevated.
Consumers appear resilient, as inflation-adjusted spending rose by 0.3%, with overall consumer spending increasing, particularly in the services sector (including financial, healthcare, and housing). Gasoline spending also increased, largely due to higher pump prices. Ongoing growth in aggregate demand—whether through consumers purchasing more goods and services or businesses investing in AI—is inflationary.
Households have been saving less and borrowing more as wage growth has lagged behind inflation. For the first time in four months, disposable income growth outpaced inflation, which should alleviate some pressure on household budgets. This gain was primarily due to wage increases and a second round of payments to farmers under the American Relief Act of 2025. The increase in disposable income helped families save more as the personal savings rate rose to 3.0% after hitting a four-year low in April.
The ongoing inflationary momentum and rising consumer spending will likely pressure the Federal Reserve to delay interest rate cuts and consider tightening monetary policy, particularly given the labor market’s continued strength. A combination of rising incomes and persistent inflation does not suggest a slowdown in demand or a decrease in inflation.
Looking ahead, June’s Employment Situation report, set for release on July 2, will be closely monitored—particularly regarding the labor market’s strength, and whether hourly wage growth outpaces inflation. Higher Rock will publish a summary and analysis shortly after the report is released. Stay tuned.
