Truflation BLS CPI Forecast and US Monthly Inflation Report - May 2026.

Economic Overview

Despite ongoing concerns about inflation, interest rates, and household finances, U.S. consumer spending remains remarkably resilient. Census Bureau retail sales data shows total sales increased by 4.9% year over year in April, up from 4.2% in March. Even excluding gasoline purchases, spending growth accelerated to 3.7% year over year from 3.2% in March. Bank of America’s credit and debit card spending data tells a similar story, with spending per household rising 4.8% year over year in April, compared with 4.3% in March.

However, beneath the headline strength, there are growing signs that consumer behavior is changing. Spending growth slowed across several discretionary categories during April, highlighting an increasingly cautious consumer and a widening divide between essential and non essential purchases.

Consumers continue to prioritise spending on necessities such as groceries, utilities, fuel, housing related expenses, healthcare and insurance. These categories have remained relatively resilient despite elevated living costs, reflecting households’ focus on affordability and maintaining core living standards. This suggests that while consumers remain willing to spend, spending decisions are becoming increasingly deliberate, with essential purchases taking priority over discretionary ones.

At the same time, discretionary categories are showing signs of softening. Recreation and culture, dining out, travel, entertainment, apparel, and home furnishings have all experienced slower spending growth compared with earlier in the year, indicating that households are becoming more selective in where and how they spend their money.

Exhibit 1 – Retail sales remain strong even taking out the impact of Gasoline

Source: US Census Bureau; Advance Monthly Retail Sales Survey (Adjusted & Year on Year)

Recent consumer data suggests that lower and middle income households are becoming increasingly cautious, reducing spending on discretionary or "nice to have" items and, in some cases, trading down to lower cost alternatives. This moderation in discretionary spending is an important signal, as these categories are typically the most sensitive to consumer confidence, income growth and economic uncertainty.

One of the most significant themes emerging from recent spending data is the persistence of a K-shaped consumer recovery. This growing divergence in spending behavior is becoming a defining characteristic of the current consumer environment.

Despite continued growth in consumer spending, higher prices and a decline in disposable personal income are beginning to weigh on household finances. It is therefore not surprising that Americans are saving less. The personal savings rate fell to 2.6% in April, down from 3.2% in March and 5.8% a year earlier, compared with a 30-year average of 5.7%. In other words, Americans are currently saving at less than half their long term norm.

The current savings rate is also the lowest since June 2022, when inflation was running at multi decade highs and households were still benefiting from pandemic era stimulus savings. The continued decline in savings suggests that many households are increasingly relying on existing financial buffers to sustain spending, pointing to growing financial pressure across parts of the U.S. consumer landscape.

Exhibit 2 – Personal Savings Rate in the US is continuing to come down

Source: Bureau of Economic Analysis; Personal Income and Outlays Report

But are Consumers Running out of Money?

Rising credit card delinquencies and growing concerns about household debt have fueled a narrative that American consumers are becoming increasingly "tapped out." According to the Federal Reserve Bank of New York, approximately 13% of credit card accounts were at least 90 days delinquent in the first quarter of 2026, the highest level since 2008. Americans currently hold roughly $1.25 trillion in credit card debt (down from $1.28 trillion in Q4), while average credit card interest rates remain above 21%.

These developments highlight genuine financial stress among some households, particularly lower income consumers who have been disproportionately affected by higher living costs. In some cases, consumers appear to be relying on borrowing to maintain spending levels, raising concerns that households are effectively mortgaging their future to sustain their present standard of living.

However, the broader household balance sheet suggests a more nuanced picture.

While credit card debt attracts the most attention, it represents only a small portion of total household liabilities. As shown in Exhibit 3, mortgages account for approximately 70% of all household debt, while credit cards represent just 7%. Student loans, auto loans, home equity loans, and other forms of borrowing collectively make up the remaining balance.

Exhibit 3 – Credit Cards represent 7% of Total Household Debt Balance

Source: Federal Reserve Bank of New York, Quarterly Report of Household Debt & Credit

This does not diminish the challenges faced by households struggling with revolving debt, but it does provide important context. Credit card debt is often the most visible and expensive form of borrowing, yet it remains a relatively small component of overall household leverage.

Student and auto loans are seeing higher delinquency rates alongside credit cards. Exhibit 4 shows the percentage of household debt 90 days delinquent or more is 3.4%, a return to pre-pandemic levels.  Student loans make up the most at 0.9 percentage points of this, with credit cards being 1.1 percentage points of this and auto loans being half a percentage point. Meanwhile mortgages are less than 0.1% of this. 

Exhibit 4 – Percentage of Balances at least 90 Days Delinquent

Source: Federal Reserve Bank of New York, Quarterly Report of Household Debt & Credit

In aggregate, delinquency rates were higher throughout much of the 2010s and prior to the pandemic, yet that period was neither recessionary nor associated with a financial crisis. Given this historical context, it is difficult to argue that a return to pre pandemic delinquency levels alone would be catastrophic today.

It is also important to note that the unusually low delinquency rates observed between 2020 and 2024 were largely driven by the Biden Administration's student loan repayment moratorium. The resumption of payments has naturally pushed delinquency rates higher, but so far has not resulted in broader economic disruption.

Household Debt Service Ratio risen from pandemic lows but historically contained

Source: Federal Reserve; Household Debt Service Ratio

While signs of financial strain are becoming increasingly evident among certain households, the broader household balance sheet remains far more resilient than headline credit card delinquency figures alone would suggest. Although credit card delinquencies have risen, aggregate measures of household wealth, debt servicing capacity, and net worth indicate that the U.S. consumer remains in relatively healthy financial condition overall.

Is the Labor Market Entering Its  Next Chapter

The labor market continues to demonstrate remarkable resilience. Nonfarm payrolls increased by 172,000 in May, only modestly below April's gain of 179,000 and well above consensus expectations of 80,000. Meanwhile, the unemployment rate remained unchanged at 4.3%.

This marks the third consecutive month in which job creation has exceeded 100,000. While one strong employment report may be dismissed as noise, three consecutive months suggest a genuine trend. Compared with last year, the labor market appears considerably stronger and continues to perform well despite elevated inflation and higher energy prices.

Exhibit 6 – Job Creation in the US is on the Rise

Source: Bureau of Labor Statistics; Employment Situation Report

Looking beyond the headline figures reveals further reasons for optimism. Most notably, job growth is becoming increasingly broad based, with multiple sectors posting solid gains. Leisure and hospitality led all industries, adding 70,000 jobs, well above its twelve-month average of 14,000 per month and potentially reflecting increased hiring ahead of the FIFA World Cup. Local government employment increased by 55,000, while healthcare, one of the labor market's strongest sectors in recent years, added a further 35,000 jobs, broadly in line with its historical trend. Social assistance contributed an additional 12,000 positions.

Both Revelio Labs and ADP employment reports reinforce this positive picture, suggesting that hiring momentum is strengthening across a wider range of industries within the private sector.

A second encouraging development is the trajectory of wage growth. According to Truflation Pay, which captures earnings across full-time, part-time, and temporary workers, pay growth has moderated from its post-pandemic peak but continues to outpace inflation. For much of the past three years, workers have experienced positive real pay growth, helping to support household purchasing power and consumer spending.

Exhibit 7 – Truflation Pay continued to outstrip Truflation CPI Inflation Growth

The primary concern during April and May has been the resurgence in inflation driven by higher energy prices following disruptions to global oil supplies. However, pay growth of 4.2% year on year in May remains supportive and continues to provide some relief for households facing higher living costs.

One area that remains highly uncertain is the impact of artificial intelligence on the workforce. While AI adoption continues to accelerate, widespread job displacement has yet to emerge. Instead, AI appears to be reshaping job requirements, altering skill demands, and blurring the boundaries between traditional roles.

The excitement surrounding AI is currently moving faster than many organizations’ ability to effectively implement it. Businesses increasingly feel pressure to adopt AI technologies, yet many remain uncertain about how best to integrate them into existing workflows. As a result, a growing mismatch is emerging between the skills employers are seeking and those currently available in the labor market.

However, the most powerful force shaping today's labor market may not be AI at all, it is demographics. Ageing populations, lower workforce participation rates, and slower labor force growth continue to exert a far greater influence on labor market dynamics than technological disruption. Unlike AI, demographics rarely dominate headlines, but they remain one of the most significant drivers of labor market outcomes.

Taken together, recent employment data suggest that the so called "hiring recession" is over. Labor demand remains healthy, wage growth continues to support real incomes and employment gains are becoming increasingly broad based across industries.

For the Federal Reserve, these developments are unlikely to strengthen the case for near term interest rate cuts. Instead, policymakers remain in a familiar position: monitoring inflation closely while waiting for clearer evidence that price pressures are moving sustainably lower.

The broader U.S. economy continues to display resilience. Gross domestic product expanded at an annualised rate of 1.6% in the first quarter, while the Atlanta Fed's GDPNow model currently points to growth of approximately 3% in the second quarter.

However, the composition of consumer spending is evolving. Essential categories continue to perform well, while discretionary spending is beginning to soften, particularly among lower- and middle-income households. The persistence of this K-shaped consumer environment suggests that aggregate spending data may continue to appear healthy even as financial pressures intensify for specific segments of the population.

While rising delinquencies and growing household debt burdens warrant close monitoring, broader household balance sheet indicators suggest consumers are not yet approaching a systemic financial stress point.

Looking ahead, the key question is whether inflation will continue to moderate and whether the recent softness in discretionary spending becomes more widespread across income groups or remains concentrated among financially constrained households. The answer will go a long way toward determining whether the U.S. economy can maintain its current balance between resilience and restraint.

Inflation is Fighting Back

Higher energy prices continue to push headline inflation higher, and there is little prospect of meaningful relief from food prices in the near term given ongoing pressures from agricultural commodities and beef prices.

Truflation forecasts headline and core CPI to rise by 0.5% and 0.3% month on month, respectively, in May. If realized, this would lift headline year over year inflation rate to 4.2%, while core would edge up to 2.8%. Although core inflation remains well below headline, both measures are moving in the wrong direction from the Federal Reserve's perspective.

Exhibit 8 –Truflation Predictions of BLS CPI Release for May

Higher jet fuel costs are also feeding into services inflation, while a still tight labor market is keeping wage growth elevated and limiting the pace of services disinflation. Meanwhile, goods inflation has been partially masked by softness in new and used vehicle prices, obscuring mounting price pressures across trade exposed categories such as apparel, personal care products, and motor vehicle parts.

Both the ISM Manufacturing and Services surveys highlighted a renewed surge in input costs during May. Recent Producer Price Index (PPI) data also suggests that firms retain sufficient pricing power to pass higher costs on to consumers. Truflation expects this pass through effect to continue in the coming months, supporting the forecast 0.5% monthly increase in headline inflation. Reinforcing this view, the April NFIB survey showed that nearly 30% of small businesses plan to raise prices over the next three months, pointing to continued inflationary pressures throughout the summer.

This presents a mixed picture for the economy. Higher prices are undoubtedly bad news for consumers, but they may prove supportive for the labor market. Firms that can preserve margins through price increases are less likely to resort to large scale layoffs.

Indeed, the May employment report showed continued job creation alongside a historically low unemployment rate, suggesting that labor market conditions remain healthy. The trade-off, however, is that resilient employment may come at the expense of further pressure on household budgets.

Exhibit 9 – ISM Survey & Producer Price Index flag continued price pressures in May and beyond

Source: BLS  PPI Report,  ISM Manufacturing and Services PMI Reports & Truflation CPI

Truflation Goods prices rose a further 1.1% month on month in May, driven by ongoing supply constraints, higher production costs, and inventory repricing. These developments point to a continued cost push inflation environment, fueled by second-round effects from energy markets and trade related disruptions.

Although the ISM Manufacturing Prices Index eased slightly to 82.1 in May from 84.6 in April, it remains exceptionally elevated and marks the twentieth consecutive month of rising input costs. Price pressures remain widespread, with 16 of the 18 industries surveyed reporting higher raw material costs. Looking ahead, manufacturing price pressures are likely to remain elevated while energy markets remain disrupted. However, a gradual normalisation of supply chains could provide meaningful relief further down the road.

Exhibit 10 – Truflation Year on Year Key Inflationary Metrics: Goods vs Services vs Core

Truflation Services prices increased by a more modest 0.5% month on month in May, driven primarily by persistently elevated labor costs. Although wage pressures have moderated from their post pandemic peaks, they continue to pass through into consumer prices, particularly in labor intensive sectors such as hospitality and food services.

The ISM Services Prices Index increased further to 71.3 in May from 70.7 in April, its highest reading since August 2022. Notably, all 18 industries surveyed reported rising costs, highlighting the broad based nature of service sector inflationary pressures.

Exhibit 11 – Truflation Year on Year Category Inflation Drivers

In May, the largest upward contributors to inflation were food, transportation and utilities. Offsetting some of these pressures, housing, recreation and culture and healthcare were the largest downward contributors to overall inflation.

Sector-Specific Inflation Drivers

• Utilities: +1.9% MoM | +7.5% YoY. Utility prices continue to rise due to growing electricity demand, major grid infrastructure upgrades, and higher energy costs. Electricity providers are investing heavily in generation, transmission, and grid resilience to accommodate rapidly growing demand from AI data centers, electrification, and broader economic activity, with an increasing share of these costs flowing through to consumers. Natural gas prices also moved higher as power-sector demand strengthened ahead of the summer cooling season, contributing to gains across electricity and fuel-related categories. With U.S. electricity consumption projected to reach new record highs in 2026 and utility capital spending continuing to accelerate, upward pressure on household utility bills is likely to persist through the remainder of the year.

• Transportation: +1.3% MoM | +6.3% YoY. The May increase was overwhelmingly a gasoline story, with fuel prices rising 8.0% during the month as higher crude oil prices and ongoing disruption to Middle East energy flows continued to push costs through the supply chain. Tight gasoline inventories ahead of the summer driving season further amplified price pressures, while seasonal demand and the transition to more expensive summer fuel blends added additional upward momentum. Vehicle purchase prices were effectively unchanged and public transportation costs declined, highlighting how concentrated the inflationary pressure was within fuel markets. Unless oil supply conditions improve materially, transportation costs are likely to remain elevated through the summer travel season.

• Food & Non-Alcoholic Beverages: +1.1% MoM | +0.6% YoY. Food prices accelerated sharply in May, driven by a combination of higher transportation costs, persistent supply constraints, and elevated operating expenses throughout the food supply chain. Grocery prices were supported by continued pressure in categories such as beef and coffee, where constrained supplies and unfavorable weather conditions have limited production and kept wholesale costs elevated. Food away from home continues to rise faster than grocery prices as restaurants pass through higher labor, insurance, and occupancy costs to consumers. With fuel costs increasing and several agricultural commodities still facing supply side challenges, food inflation is likely to remain firmer through the summer months than earlier in the year.

• Health: -0.1% MoM | +10.7% YoY. The annual figure remains the story. Health insurance costs continue to rise sharply following the expiration of enhanced ACA subsidies, while insurers are also pricing in higher healthcare utilization and the growing cost of specialty treatments, particularly GLP-1 medications. The slight monthly decline reflects modest easing in prescription drug and medical supply prices, which offset continued pressure from insurance and medical services. Healthcare inflation is likely to remain elevated through 2026 as insurers continue adjusting premiums to reflect higher underlying medical spending.

• Housing: +0.3% MoM | -5.0% YoY. Housing continues to present a mixed picture. Monthly prices are receiving modest support from the spring selling and leasing season, but the annual figure remains deeply negative as housing markets continue to adjust from the elevated prices and affordability constraints that characterized much of 2025.

  • Owned: Owner-occupied housing prices rose just 0.1% in May, reflecting a market still constrained by affordability challenges and elevated mortgage rates. Inventory levels have improved substantially from pandemic-era lows, giving buyers more negotiating power and limiting broad-based price appreciation. While some Northeast markets continue to show resilience, much of the South and Southwest remains comparatively soft, suggesting only modest price growth in the near term.

  • Rentals: Rental prices increased 0.5% in May as seasonal demand strengthened heading into the summer moving period. However, a large wave of new apartment supply and elevated vacancy rates continue to create one of the most renter-friendly markets in years, with concessions remaining common in many metropolitan areas. As a result, rental inflation is likely to remain contained despite seasonal increases.

  • Short-term lodging: Other lodging prices rose 1.7% in May as strong leisure travel demand supported higher hotel and short-term rental rates ahead of the peak summer season. Travel volumes remain resilient despite broader economic uncertainty, allowing operators to maintain pricing power in many popular destinations. With summer travel demand expected to remain strong, meaningful price relief appears unlikely in the near term.

• Recreation & Culture: +0.2% MoM | +1.7% YoY. Recreation prices edged higher in May, driven primarily by gains in audio-visual equipment and hobby-related goods, reflecting continued consumer spending on home entertainment and leisure activities. The increase was partially offset by lower fees and admissions, suggesting softer demand and promotional pricing across some entertainment venues following the spring travel season. Technological improvements and strong competition continue to limit inflation across many recreation categories, keeping overall price growth relatively modest despite resilient consumer demand.

Inflation Outlook: Elevated and then gradually moderating

M2 money supply reached a record $22.8 trillion in April 2026, increasing by approximately $118 billion from March and roughly 5% year over year, marking the strongest rate of money supply growth since mid 2022. The expansion reflects a steadily more liquid environment that supports consumer spending, business investment and asset prices. Historically, sustained increases in money supply can contribute to inflationary pressures when accompanied by strong demand and supply side constraints. The ongoing growth in M2 may help sustain price increases in sectors already experiencing structural inflation, including healthcare, utilities, education, and energy related categories. As a result, accelerating money supply growth represents a medium term upside risk to inflation, particularly if economic activity remains resilient through the second half of 2026.

Exhibit 12 – Growth in the M2 Money Supply

Source: Board of Governors of the Federal Reserve

To date, there have been five months of data since M2 resumed sustained expansion in December 2025. Over that period, M2 has expanded by $203.1 billion, representing approximately 63% more growth than during the same five-month period a year earlier. The key question is whether this reflects the beginning of a sustained acceleration in money supply growth or merely a temporary rebound following the monetary contraction of 2022–2023.

Beyond the potential impact of M2, several other factors are likely to shape the inflation outlook through Q2 and the remainder of 2026.

• Energy remains the most immediate inflation risk. Transportation (+6.3% YoY) and Utilities (+7.5% YoY) are already reflecting the impact of higher oil, gasoline, natural gas, and electricity prices. Any escalation in Middle East tensions, refinery disruptions, or LNG market tightness could rapidly feed through to fuel, freight, food, and utility costs. Energy remains the category most capable of altering the inflation outlook in a short period of time.

• Housing supply and mortgage rates continue to represent the largest disinflationary force in the inflation basket. Elevated mortgage rates, improving housing inventory, and record apartment completions are helping contain shelter costs. However, a meaningful decline in mortgage rates or a faster-than-expected rebound in housing demand could shift housing from a drag on inflation to a contributor.

• Labor markets and wage growth remain critical for service-sector inflation. Healthcare, education, household operations, restaurants, hotels, and utilities all continue to face wage-related cost pressures. Although labor markets have cooled from their post-pandemic peaks, wage growth remains above pre-2020 norms. Persistent shortages in specialized occupations could keep service inflation elevated.

• Trade policy and tariffs continue to influence pricing across apparel, household goods, electronics, and selected food categories. The key question for the second half of 2026 is how much additional tariff pass through remains embedded within supply chains. If businesses continue transferring higher import costs to consumers, goods inflation could remain firmer than many forecasters currently anticipate.

• AI infrastructure and electricity demand represent one of the newest structural inflation themes. Utilities across the United States are investing heavily in generation capacity, transmission networks, and grid modernization to support rapidly growing demand from AI data centers. These investments are increasingly being reflected in utility bills and could become a persistent source of inflationary pressure extending well beyond 2026.

The most likely inflation environment for the remainder of 2026 is one of sector divergence rather than broad based inflation. Housing and communications should continue to exert disinflationary pressure, while healthcare, utilities, education, and energy-sensitive categories remain the primary sources of inflation. The largest upside risks are energy shocks, stronger-than-expected money supply growth, and persistent wage pressures across service industries. The largest downside risk remains continued housing weakness combined with softer consumer demand.

The most likely outcome is a choppy, range bound inflation environment in which headline CPI remains highly sensitive to energy market volatility. Much will depend on the duration and intensity of the Middle East conflict, particularly the extent and persistence of disruptions to key shipping and energy routes. Given these uncertainties, the margin for forecasting error remains higher than normal.

Truflation's current base case for BLS CPI is:

• June 2026: 4.0%–4.1% YoY

• End of Q3 2026: Gradual cooling toward 3.6%–3.8% YoY

Should energy prices normalize more quickly than expected, inflation could decelerate faster through the second half of 2026, potentially reaching lower levels by the end of Q3 before stabilizing into year-end.

Summary

The combination of rising energy prices, a potential shift in monetary conditions, and resilient consumer demand creates a complex inflation backdrop. While structural disinflationary forces remain in place. Near term, energy markets, money supply growth, wage pressures, tariffs and rising electricity demand from AI infrastructure represent the key upside risks. The most likely outcome remains a range bound inflation environment, with inflation potential expanding into a broader set of specific sectors rather than just energy.

With inflation already above target and energy costs climbing, the Federal Reserve faces a more challenging policy landscape. The likelihood of rate cuts in 2026 has diminished and the possibility of a more prolonged pause, cannot be ruled out.

About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 15 million product prices across the US. These indexes are released daily, making it one of the most up to date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.93% accuracy in predicting inflation in the last 12 months.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on May 2026