Consumers spend through higher prices at the pump

June 25, 2026

Personal disposable incomes jumped 0.3% after adjusting for inflation in May, making it the second increase in eight months. A surge in farm income due to disaster relief from the federal government accounted for much of that increase.

A rebound in payrolls alone was partially offset by the drag from higher energy prices due to the conflict in the Middle East. Cuts to Medicaid and SNAP benefits are another hurdle, especially for low-income households.

Recent research by Moody’s Analytics underscores how uneven income gains remain. The top 20% of households continue to gain ground relative to inflation in the most recent cut of the data, while the bottom 80% have lost ground.

Ultra-wealthy carry the day

Personal consumption expenditures rose 0.3% after adjusting for inflation. Spending gains were broad-based, but stronger for goods than services. Spending on big-ticket goods from vehicles to furniture and appliances picked up after a lackluster April. Spending on nondurable goods was more muted. 

Spending on food was weak, reflecting a combination of shifts due to GLP-1 drugs, the squeeze of higher prices at the gas pump and a drop in funding for SNAP benefits. Food banks are slammed. Spending at gas stations dropped during the month as people cut back on using their vehicles. 

Low- and middle-income households focused on necessities, while some high-income households traded down. Big-box discounters, off-price retailers and fast-food chains benefited.

The ultra-wealthy continue to travel and spend with abandon, booking for the summer travel season. That did not help spending on food and accommodation much in May but will be a tailwind as we go into summer. 

The FIFA World Cup games will no doubt add to those gains over the summer. Travel from abroad is up, along with bookings for hotel rooms and short-term rentals in host cities. 

The saving rate was revised higher in April to 3% and held at that pace in May. That is still extremely low but overstates the cushion on saving, notable for affluent households, which are driving spending gains. 

Net worth as a share of disposable income jumped close to the 2021 record at the end of 2025. It likely exceeded that peak in 2026 given the recent surge in IPOs and continued gains in the broader stock indices through May. 

The wild card for the outlook remains the resilience of equity market gains, which have become more volatile of late. Anything that derails the upward march in stock valuations would deal a disproportionate blow to consumer spending. 

The wealth effects tied to housing are larger than those tied to equity valuation. However, higher mortgage rates have lessened their spillover effect on consumer spending. Home equity lines of credit are more difficult to tap and more costly than they were just a few years ago.

Hot and sticky inflation 

The personal consumption expenditures (PCE) price index, the Federal Reserve’s favored inflation gauge, jumped 0.5% in May and surged 4.1% from a year ago. That is more than double the Fed’s 2% annual target and the hottest annual pace for the index since April 2023.

The three-month annualized pace, which is a better measure of momentum, increased at 6.3% in May. That is up from 6.1% in April and its hottest pace since the searing bout of inflation in mid-2022. 

Energy continued to play a key, but not singular, role in those gains. Prices at the gas pump alone jumped 7.0% during the month. Futures prices for oil have fallen much faster than pump prices in response to the cease-fire. That reflects the higher prices retailers paid for gasoline that had been refined earlier and kept in underground tanks.

Retail gasoline margins help explain why pump prices fall more slowly than wholesale costs. Margins are often squeezed when prices are rising; they widen when wholesale prices fall. Gas stations recoup what they lost to rising prices when prices start to drop.

In response, we tend to see what is known as “rockets and feathers”: gas prices tend to go up like a rocket and fall like a feather. The result leaves consumers waiting longer for the full drop in oil prices to show up when they fill their tanks.

The core PCE, which strips out food and energy, rose 0.3% and jumped 3.3% from a year ago, a touch higher than the pace of April before rounding. That is the hottest pace since September 2023. 

The three-month annualized pace slipped to 3.4% from 3.7% last month. That is the slowest pace since January but well above the 2.6% pace of the fourth quarter of 2025.

Price increases during the month were spread across both goods and services. Nondurable goods got a bump from apparel costs, while consumer electronics are poised to move higher. 

A shortage of computer chips due to the AI boom is pushing up the costs of consumer electronics, which fell precipitously in the past. Everything from laptop computers to smartphones and gaming consoles is affected. 

This is a sector where prices fell for decades. That is a major shift and a problem for the Federal Reserve, as it is no longer an offset to inflation elsewhere.

The super core services PCE index, which strips out shelter costs and makes up more than half of the index, jumped 0.5% in May. The index jumped 3.9% from a year ago, its hottest pace since late 2024. The three-month annualized pace jumped to 4% from 3.1% last month.

A rebound in the cost of portfolio services boosted those increases. That component alone soared 0.5% and accounted for nearly half of the overall gain. Legal services were revised as well. 

Absent the jump in portfolio services, the super core services PCE index rose a little more than 0.2% before rounding. That reduces that component in the PCE index to a 3.6% increase from a year ago. That is higher than we saw late last year.

Indeed, it is the stickiness in service-sector inflation that has raised red flags at the Fed. That inflation should be more insulated from external shocks such as tariffs and energy prices. It showed signs of accelerating from an already elevated pace prior to the onset of the Middle East conflict in January and February.