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May 30, 2025

The personal income and consumption expenditure (PCE) report revealed that inflation continued to cool in April along with consumer spending. The PCE inflation index rose a tepid 0.1% in April; that’s up 2.1% from a year ago but a drop from March’s annual pace of 2.3%. The April figure is the coolest reading on the Federal Reserve’s key inflation measure since September 2024, when it started to cut rates.

Energy prices rose, despite a drop in prices at the gas pump. Utility costs increased during the month. Grocery store prices fell 0.3% as the effects of the bird flu on egg prices abated. A slowdown in exports to China has helped to temper food prices. That was the largest monthly decline since July 2020. The outlier is beef, which continues to move higher because the beef stock was culled with the spread of the bird flu and takes much longer to rebuild.  

The core PCE, which excludes the volatile food and energy components, edged up 0.1% as well. That lowered the core measure to 2.5%, the coolest pace since March 2021 when inflation began its post-pandemic ascent.

The slowdown was concentrated in core services, which moved sideways. That is the coolest measure for core services, which strips out shelter costs, since April 2020. Airfares and hotel room rates fell, especially for budget conscious consumers. Increases in insurance costs slowed. The slowdown in the pace of increase in insurance premiums will be short-lived; tariffs are expected to raise the costs of repairs to vehicles and property.

Core goods prices, which exclude food and energy, rose 0.3%. Those gains were driven by a 0.5% increase in durable goods. The increase in recreational goods and vehicles alone jumped 1.5% during the month, the fastest pace since January 2024. That is the only month higher, going all the way back to the 1970s. It reflects front-running ahead of tariffs.

Household appliances increased 1.2%, after declining in March. Many stores deeply discounted existing inventories to shore up their cash cushion ahead of tariff announcements. The effects of tariffs are only just beginning to show up in the data and not expected to hit in full force until the third quarter.

Rush to get on Social Security rolls boosted incomes, savings

Personal disposable incomes rose 0.7% after adjusting for inflation. That is the same as last month, which was revised up. The elevated pace of income growth in both March and April was due to a stunning surge in Social Security payments. The two-month gain in Social Security payments was the strongest since 1981.

Baby boomers who feared that their Social Security benefits might be cut opted in earlier than previously planned. That has boosted government spending year-to-date and underscores the role that aging demographics are exerting on the two-thirds of government spending that is mandatory.

Consumer spending rose a more tepid 0.1% after adjusting for inflation. That marks a sharp slowdown from the 0.7% pace in March. Spending on services offset a drop in spending on goods. Vehicle sales moderated as the push to front-run tariffs tapered off. The decline in goods spending was concentrated in big-ticket durables.

The saving rate jumped to 4.9%, the highest level since May 2024 and up 1.4 percentage points from the low hit in December. We saw a surge in spending late in 2024, especially during the last four weeks of the year. Consumer attitudes remain bearish now despite a slight bounce in May.