Personal income and spending May 2024

Inflation downshifts amid consumer prudence

  • The May personal income and spending report confirmed that a continued downshift in economic activity is underway with cooler consumer spending momentum and easing inflation. Real consumer spending grew 0.3% month over month (m/m) in May, following a 0.1% decline in April, as households showed renewed appetite for goods but remained prudent with their services outlays. With real disposable income rebounding 0.5% m/m, the personal savings rate rose 0.2 percentage points (ppt) to 3.9%, its highest level since January.

  • On an annual basis, real consumer spending growth firmed to 2.4% year over year (y/y) in May and real disposable income growth edged 0.2ppt higher to 1.1% y/y – still the second slowest pace since December 2022. We continue to expect softer consumer spending trends as slower labor market momentum limits income growth and pushes more families to exercise spending restraint amid reduced savings buffers and higher debt burdens. We see consumer spending growing 2.1% this year, after 2.2% growth in 2023.

  • Inflation cooled markedly in May as the headline personal consumption expenditures (PCE) deflator was unchanged on the back of declining gasoline prices and goods prices, and softer price increases in services. The core PCE deflator rose 0.1% m/m (0.08% to be precise) amid cooler transportation, financial services and recreation prices. As a result, headline PCE inflation fell to 2.6% y/y (2.56% to be precise) while core inflation eased 0.2ppt to 2.6% y/y (2.57% to be precise) – its lowest since March 2021.

  • Slower consumer spending growth, reduced markups, declining rent inflation and moderating wage growth will support further disinflation even if a temporary plateau forms around 2.6% to 2.7% during the next two months. We foresee headline and core PCE inflation ending the year around 2.5% y/y.

  • We continue to believe a July onset of the easing cycle would have been optimal given easing inflation and softening labor market conditions, but a September onset is now more likely given policymakers’ backward-looking hawkish bias. We expect two 25bps rate cuts in 2024 and 125bps of easing in 2025.


In the details

Real personal outlays rose 0.3% m/m in May, following a 0.1% decline in April.

  • Real durable goods outlays rebounded strongly and registered a 1.1% advance – the largest increase since December 2023 – following a downwardly revised 0.7% contraction in April. The gain was driven by stronger outlays on recreational goods and vehicles (+2.6%) and higher spending on furnishings and household equipment (+0.9%). Meanwhile, motor vehicle purchases (-0.1%) edged slightly lower following a solid gain in April.

  • Real spending on nondurable goods climbed 0.3% – partly reversing their April contraction – as consumers spent more freely on clothing (+1.1%) and at the gas station (+1.3%) amid lower prices at the pump.

  • Services outlays remained sluggish in May, rising only 0.1% for a second consecutive month. Weaker spending at restaurants and hotels (-0.5%) and on housing and utilities (-0.1%) were offset by a strong increase in spending on transportation services (+1.4%). Recreation services (+0.3%), financial services (+0.3%) and health care (+0.2%) all saw modest gains.

Personal income rose a solid 0.5% in May driven by a robust 0.7% advance in wages and salaries, a 0.4% advance on income receipts on assets and a 0.3% in government benefits. Encouragingly, disposable income adjusted for inflation rose 0.5%, the strongest increase since January 2023.

On the inflation front, the headline PCE deflator was unchanged on the back of declining gasoline prices and the core PCE deflator rose only 0.1% m/m (0.08% to be precise). As a result, headline PCE inflation fell to 2.6% y/y (2.56% to be precise) while core inflation eased 0.2ppt to 2.6% y/y (2.57% to be precise) – its lowest since March 2021. Importantly, the three-month annualized headline inflation reading fell 1.4ppt to 2.4% while the six-month annualized reading was unchanged at 3%. The three-month annualized core inflation reading eased 0.7ppt to 2.7% and the six-month annualized reading was also unchanged at 3.2%.

A broad-based downshift in inflationary pressures was visible across both goods and services categories:

  • Durable goods prices fell by the most since September 2001, down 0.8% as prices declined over the month for furniture, recreational goods and other durable goods.

  • Nondurable goods prices declined 0.2% led by lower gas and clothing prices.

  • Services prices rose a muted 0.2% (0.165% to be precise) as falling prices for transportation, recreation, and financial services and insurance prices were offset by modest gains housing and utilities, health care and food services.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.