US consumer spending falls unexpectedly in May

U.S. consumer spending unexpectedly fell in May as the boost from the pre-emptive buying of goods like motor vehicles ahead of tariffs faded, while monthly inflation increases remained moderate.

Consumer spending, which accounts for more than two-thirds of economic activity, dropped 0.1% last month after an unrevised 0.2% gain in April, the Commerce Department's Bureau of Economic Analysis said on Friday. Economists polled by Reuters had forecast consumer spending would edge up 0.1%.

President Donald Trump's sweeping tariffs, which have led businesses and households to front-run imports and goods purchases to avoid higher prices from duties, have muddled the economic picture. Economists warned it could take time for the tariff-related distortions to wash out of the data.

A record goods trade deficit in the first quarter, thanks to a deluge of imports, accounted for much of the 0.5% annualized rate of decline in gross domestic product during that period.

Consumer spending also nearly braked last quarter after being propelled by households pulling forward goods purchases. Households also spent less on services last quarter, helping to restrain growth in consumer spending to only a 0.5% pace, the slowest rate since the second quarter of 2020.

That data potentially puts spending on a slow growth path in the second quarter. 

The combination of soft consumer spending and inflation is, however, unlikely to spur the Federal Reserve to resume cutting interest rates in July. Fed Chair Jerome Powell told lawmakers this week that the U.S. central bank needed more time to gauge the impact of tariffs on prices before considering a rate cut. 

Economists argue that price increases have remained moderate because businesses are still selling inventory accumulated before the tariffs went into effect. They expect inflation will start picking up, beginning with consumer price data for June.

The Personal Consumption Expenditures (PCE) Price Index gained 0.1% in May, matching the rise in April, the BEA said. In the 12 months through May, PCE inflation increased 2.3% after climbing 2.2% in April.

Stripping out the volatile food and energy components, the PCE Price Index increased 0.2% last month. That followed a 0.1% rise in the so-called core PCE inflation in April.

In the 12 months through April, core inflation advanced 2.7% after rising 2.6% in April. The Fed tracks the PCE price measures for its 2% inflation target. The central bank last week left its benchmark overnight interest rate in the 4.25%-4.50% range, where it has been since December.