Inflation Keeps the Consumer Economy Running on Credit

Higher incomes are offering households some relief, but rising prices continue to claim a substantial share of those gains.

Fresh data released Thursday (June 25) by the Bureau of Economic Analysis showed that personal income, disposable personal income and consumer spending each rose 0.7% in May.

Yet inflation, the data indicate, remained firm enough that real disposable income was essentially unchanged from a year earlier, underscoring a reality that many households continue to confront: earning more money does not necessarily translate into greater financial flexibility.

The spending figures suggest households are still opening their wallets. Personal consumption expenditures increased during the month, and inflation-adjusted spending rose 0.3%. However, the composition of that spending matters. Much of the nominal increase reflected higher prices rather than materially stronger demand. Energy costs, transportation services and financial services all posted notable price increases during the month.

For households, that means budget pressure has not disappeared even as income growth remains positive.

PYMNTS Intelligence data indicate that consumers’ financial experiences vary considerably depending on income. Households earning less than $50,000 annually continue to report markedly weaker financial sentiment than higher-income consumers, reflecting limited savings buffers and less confidence in their ability to absorb unexpected expenses. By contrast, households earning $150,000 or more report substantially stronger confidence in their financial position and future spending capacity.

Disposable Income Gains Meet Financial Reality

The May income report contained encouraging signals. Compensation growth remained steady, transfer payments increased and proprietors’ income posted a strong gain. Disposable income also rose at the same pace as overall personal income.

Yet the broader picture is more nuanced, as the Personal Consumption Expenditures (PCE) price index rose 0.4% during the month, matching April’s increase.

The personal saving rate remained at 3%, a level that is low by historical standards. That suggests many households continue to devote most of their income toward current spending obligations rather than building larger financial cushions.

In comments provided Thursday to PYMNTS, EY-Parthenon Chief Economist Gregory Daco noted that “consumption is increasingly supported by savings drawdowns, greater reliance on credit, and wealth effects rather than income.”

PYMNTS Intelligence research offers further evidence that financial capacity is becoming more stratified. The firm’s Consumer Expectations Index found a 15-point gap in overall financial sentiment between households earning more than $150,000 annually and those earning less than $50,000. The divide extends beyond simple confidence measures and appears in assessments of emergency preparedness, savings capacity and future financial expectations.

One finding is particularly notable. Lower-income consumers report reasonable confidence in their ability to manage debt obligations, but much lower confidence in their ability to handle unexpected expenses. This means that many households believe they can keep current bills paid but remain vulnerable to financial shocks.

That distinction helps explain why alternative credit products continue to attract consumers.

Separate PYMNTS Intelligence research on installment payments and buy now, pay later (BNPL) products found that consumers increasingly use different credit tools for different purposes. Thirty-one percent of consumers reported using credit card installment plans, compared with 12% who used BNPL products.

The research also found that financial stress changes how consumers use BNPL. For financially stable households, BNPL is often associated with convenience and rapid approval at checkout. For consumers facing tighter budgets, however, BNPL begins to serve a broader purpose by helping bridge short-term liquidity needs and manage cash flow.

That does not necessarily indicate distress. Rather, it reflects a practical response to an environment where income growth and inflation continue to move in close proximity.

Spending remains positive, income continues to grow and employment conditions remain supportive. Real consumer spending has shown greater stability in recent months than it did through much of last year.

At the same time, inflation remains above the Federal Reserve’s long-run objective, and real disposable income has yet to demonstrate sustained growth.

That leaves households navigating an environment defined neither by insurmountable financial strain nor by what might be termed broad-based prosperity. Instead, the data point to a consumer economy increasingly shaped by income differences, uneven financial cushions and a growing reliance on credit products that help households manage timing gaps between earnings and expenses.