Whiff of Stagflation in May PCE, Consumers Step Back
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Consumer spending shrank and inflation rose in May – not a favorable combination for the Fed, as they continue to watch economic data very closely before they meet at the end of July. The data suggests the recent decline in consumer confidence is spreading into consumer actions, not just what they say. 

Whiff of Stagflation in May PCE, Consumers Step Back

June 27, 2025

Consumer spending shrank and inflation rose in May – not a favorable combination for the Fed, as they continue to watch economic data very closely before they meet at the end of July. The data suggests the recent decline in consumer confidence is spreading into consumer actions, not just what they say. 

Trusted Insights for What’s Ahead®

  • Rising inflation will likely continue to limit how much consumers will be able to spend on goods and services in H2, leading to significant deceleration in economic growth this year.
  • A pullback from spending on tariff-affected goods will likely weigh on consumer spending in the remainder of the year. For example, the May PCE report showed a sharp drop in spending on household appliances amid a spike in prices.
  • The extent of a sharp drop in personal income growth in May was a reversal from an outsized increase in April – reflecting a payback to the rise in Social Security benefits (see Figure 1 below) and a drop in farm income. Wages and salaries continued to increase at a solid pace, which may help consumers weather tariff price increases in H2, even as the economy is expected to slow.
  • On a year over-year basis, overall inflation increased to 2.3%
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Author

Yelena Shulyatyeva

Yelena Shulyatyeva

Senior US Economist

Read BioYelena Shulyatyeva

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