Research
June 25, 2026
PCE Deflator
Hospitality spending was flat in May despite resilience in purchasing and higher inflation
The Personal Consumption Expenditures (PCE) deflator—the Federal Reserve’s preferred measure of inflation—rose 0.4% in May, marking the second consecutive monthly increase at that pace. Much of the upward pressure continues to stem from energy costs, which have remained elevated amid the ongoing conflict in Iran. Gasoline and other energy prices climbed 6.5% in May and are up 40.5% over the past year. By contrast, food and beverages purchased for off-premises consumption increased just 0.1% in May, easing from a 0.5% gain in April, and rose 2.4% over the past 12 months.
On a year-over-year basis, the headline PCE deflator accelerated to 4.1% in May, up from 3.8% in April and marking the fastest pace of inflation since April 2023. Core PCE inflation, which excludes food and energy, rose 0.3% for the third consecutive month. Over the past 12 months, core inflation edged higher from 3.3% to 3.4%, its highest reading since October 2023.
Taken together, these data highlight a broader pattern of intensifying price pressures in May, driven in large part by higher energy costs. Importantly, inflation had already begun trending upward over the past year—even before the recent escalation in tensions in Iran—suggesting that the anticipated moderation in price growth had stalled.
Looking ahead, the recent ceasefire has led to a sharp decline in crude oil prices, which should help ease inflationary pressures in coming months—particularly if lower energy costs are sustained.
Overall, inflation remains persistently elevated and is moving in an unfavorable direction. This poses a challenge for the Federal Reserve, especially as price growth continues to drift further from its long-run 2% target. Policymakers have struck a more hawkish tone in recent communications, reflecting renewed concern about inflation. While interest rates are likely to remain unchanged in the near term, there is growing speculation that rates may need to rise later this year if inflation continues to run above levels deemed acceptable by the Federal Open Market Committee.
Beyond inflation, personal consumption expenditures rose a robust 0.7% in May, signaling continued strength in consumer activity. In nominal terms, spending has held up well over the past four months despite higher gasoline prices, weakening consumer confidence, and broader economic uncertainty. Higher tax refunds likely provided some additional support, particularly earlier in the spring. That said, spending on foodservices and accommodations was unchanged in May, slowing notably from a strong 0.8% increase in April.
Over the past 12 months, total personal spending has advanced by a solid 6.3%. Spending on foodservices and accommodations grew at a more modest 3.1% over that period, pointing to continued—but somewhat tempered—resilience in consumer demand amid ongoing headwinds and softer recent readings.
Importantly, a meaningful share of this growth reflects higher prices, with real (inflation-adjusted) consumption rising at a slower pace. Real personal consumption increased by 0.3% in May and was up 2.1% from a year earlier. In contrast, real spending on foodservices and accommodations declined 0.3% in May and fell 0.5% over the past 12 months.
Personal incomes also rose by 0.7% in May, strengthening after being flat in April. Overall, personal income grew by 3.8% over the past 12 months. Wages, which have been a large contributor to the economy’s resilience, increased 0.4% in May, with 4.1% growth year-over-year.
Of note, disposable personal income—or the amount of money that households have after paying taxes—grew 0.7% in May after falling in two of the past three months, and it rose 4.1% year-over-year. Yet, adjusted for inflation, real disposable personal income increased by 0.3% in May and was unchanged over the past 12 months. With flat growth since May 2025, it should not be a surprise that affordability has become such a concern for many consumers, with weaker real spending despite resilience in nominal terms.
The personal savings rate was unchanged at 3.0% in May, remaining the lowest since June 2022. Overall, the savings rates in the post‑pandemic period remain well below historical norms. Prior to the pandemic, the savings rate averaged 6.5% from 2017 to 2019, compared with an average of just 3.8% over the past 12 months. This suggests that consumers are dipping into their savings to finance their spending.
On a year-over-year basis, the headline PCE deflator accelerated to 4.1% in May, up from 3.8% in April and marking the fastest pace of inflation since April 2023. Core PCE inflation, which excludes food and energy, rose 0.3% for the third consecutive month. Over the past 12 months, core inflation edged higher from 3.3% to 3.4%, its highest reading since October 2023.
Taken together, these data highlight a broader pattern of intensifying price pressures in May, driven in large part by higher energy costs. Importantly, inflation had already begun trending upward over the past year—even before the recent escalation in tensions in Iran—suggesting that the anticipated moderation in price growth had stalled.
Looking ahead, the recent ceasefire has led to a sharp decline in crude oil prices, which should help ease inflationary pressures in coming months—particularly if lower energy costs are sustained.
Overall, inflation remains persistently elevated and is moving in an unfavorable direction. This poses a challenge for the Federal Reserve, especially as price growth continues to drift further from its long-run 2% target. Policymakers have struck a more hawkish tone in recent communications, reflecting renewed concern about inflation. While interest rates are likely to remain unchanged in the near term, there is growing speculation that rates may need to rise later this year if inflation continues to run above levels deemed acceptable by the Federal Open Market Committee.
Beyond inflation, personal consumption expenditures rose a robust 0.7% in May, signaling continued strength in consumer activity. In nominal terms, spending has held up well over the past four months despite higher gasoline prices, weakening consumer confidence, and broader economic uncertainty. Higher tax refunds likely provided some additional support, particularly earlier in the spring. That said, spending on foodservices and accommodations was unchanged in May, slowing notably from a strong 0.8% increase in April.
Over the past 12 months, total personal spending has advanced by a solid 6.3%. Spending on foodservices and accommodations grew at a more modest 3.1% over that period, pointing to continued—but somewhat tempered—resilience in consumer demand amid ongoing headwinds and softer recent readings.
Importantly, a meaningful share of this growth reflects higher prices, with real (inflation-adjusted) consumption rising at a slower pace. Real personal consumption increased by 0.3% in May and was up 2.1% from a year earlier. In contrast, real spending on foodservices and accommodations declined 0.3% in May and fell 0.5% over the past 12 months.
Of note, disposable personal income—or the amount of money that households have after paying taxes—grew 0.7% in May after falling in two of the past three months, and it rose 4.1% year-over-year. Yet, adjusted for inflation, real disposable personal income increased by 0.3% in May and was unchanged over the past 12 months. With flat growth since May 2025, it should not be a surprise that affordability has become such a concern for many consumers, with weaker real spending despite resilience in nominal terms.
The personal savings rate was unchanged at 3.0% in May, remaining the lowest since June 2022. Overall, the savings rates in the post‑pandemic period remain well below historical norms. Prior to the pandemic, the savings rate averaged 6.5% from 2017 to 2019, compared with an average of just 3.8% over the past 12 months. This suggests that consumers are dipping into their savings to finance their spending.