Inflation Relief For Essential Categories is Offsetting Tariff Concerns, Boosting 2025 Spending Growth

Consumer spending remains surprisingly strong through May

Tariff announcements, policy uncertainty, persistently elevated interest rates, slower hiring and geopolitical unrest seem like sufficient headwinds to generate a dip in spending. However, U.S. consumers have appeared surprisingly undeterred by the economic bumps in the road they encountered over the first five months of 2025.

Morning Consult’s data showed that consumers increased spending–adjusted for inflation and seasonality–by 4.3% year-on-year in May, marking the fourth consecutive month of higher outlays relative to year-ago levels. Compared to April, spending in May was slightly lower, aligning with the 0.9% drop in retail sales reported by the Census Bureau. 

Retail sales comprise only a relatively small part of the overall consumer spending basket, and the Census Bureau’s numbers are not adjusted for inflation. For categories like gas and autos, which were major contributors to the negative headline retail number, lower prices in May compared with April may have been a factor in the decline. Morning Consult’s spending data is adjusted for inflation and covers a broader basket, similar to the Bureau of Economic Analyses’ personal consumption expenditures (PCE) report scheduled for release at the end of the month. The relatively stronger picture painted by Morning Consult’s spending data suggests the PCE report will likewise reflect more positive growth.

Cooling costs of essentials are helping support purchases

Digging beneath the top-line number, discretionary categories are primarily responsible for driving spending growth so far in 2025. As we’ve previously written about, this dynamic is most pronounced among higher earning households, but their impact is such that it drives the topline trend. 

Real spending on discretionary goods and services like travel, new clothes and furniture has recently maintained a strong expansion, climbing 19% from January to May. Purchases across essential categories, like housing, food and gas, have been more or less flat, with May spending 0.7% lower than its January level. These differing trajectories have resulted in a reallocation of spending away from essential categories and toward discretionary items and services: Over the past year, the share of total wallet allocated to essentials fell 4.2 percentage points, with that same share shifting to an increase in discretionary goods and services.

One reason for this reallocation of spending toward discretionary categories may be softer inflation for some items that typically cause the most concern for consumers. Housing, food and energy all had relatively lower cumulative inflation from January through May of this year compared with the average inflation rates they’ve experienced in this same period over the past three years. Together, these categories–all qualified as “essentials”—make up over half of the total consumer spending basket. 

Morning Consult’s spending data seeks to measure inflation-adjusted spending, so if the quantity purchased remains stable, the reported spending number should also remain stable, regardless of price changes. Indirectly, however, inflation relief can have a substantial impact on consumers’ budget allocations. The quantity of essential purchases conducted each month is relatively more stable than discretionary purchases, because these categories meet basic needs. There is a high incentive for consumers to buy as much as their household needs, even when high inflation makes it sting, and little incentive to buy more than is needed, even if inflation relief makes it financially attainable. With discretionary goods and services, households are more able to “trim the fat” when prices are uncomfortably high, or more inclined to expand purchases to the extent they can afford to. 

This dynamic helps explain what we’ve seen so far this year: Inflation relief in essential categories has done little to increase spending on items like housing, food or gas, but has opened up more space in budgets to divert more spending to non-essential goods and services. Relative to last year, housing–the single largest monthly cost bucket for consumers–has ceded the largest share of wallet to make way for spending on other categories. Non-housing services have been the biggest beneficiary, with their share of wallet growing the most over the past year, followed by non-durable goods, including apparel, alcohol and personal care, among others.

Daily data shows no imminent signs of a slowdown in June

June spending data will be collected again once the month is complete, but higher frequency signals from Morning Consult’s Consumer Health Index (CHI) show little sign of slowing momentum over the first few weeks of June. The CHI draws upon daily sentiment and employment data to estimate overall spending demand. Readings from the first two weeks of June averaged higher than the index scores from May, suggesting spending momentum remains intact. That said, the discretionary nature of the spending driving this expansion leaves it vulnerable to a pullback if or when the economy experiences a scenario like more substantial unemployment or a resurgence in price growth, either of which has a reasonable probability of materializing over the second half of the year.