The Federal Reserve’s preferred measure showed inflation accelerating in May, with prices up 2.3% annually. The same data shows consumers, the engine of this economy, are pulling back — and more tariff-induced inflation could be on the way. We’ll dig into all the moving parts in today’s newsletter, including Wall Street’s totally unbothered reaction to all this.

Disposable incomes fell in May — down nearly 0.5% from the month before — according to a government report released Friday.

A big part of that drop was due to a temporary jump in Social Security benefits in April, when retroactive payments were issued. But even setting that aside, income growth has been weak for several months now.

Households earn money from a range of sources. Some less common ones include financial assets like stocks and rental income, but those streams haven’t been delivering much this year.

“We’re not seeing financial assets go up with abandon anymore,” said Sarah House, senior economist at Wells Fargo. “We’ve also seen the rental market soften as well.”

Still, about 60% of income comes from wages — and wage growth has slowed, too.

That’s because the job market has cooled. Employers aren’t hiring as aggressively as they were during the pandemic recovery.

“They’re not adding as many workers,” House said. “They’re not having to fight as hard for workers. And so that’s tamping down pay growth.”

To be clear, incomes are still growing faster than inflation — but that gap is shrinking. And that’s putting pressure on consumer spending.

“Spending has been running ahead of income growth for more than a year now, and that can’t last,” House said. “I think we’re seeing some reckoning there, where spending has downshifted.”

The slowdown in both income growth and consumer spending may just be getting started, said Gregory Daco, chief economist at EY.

One reason: President Donald Trump’s new tariffs have yet to push up consumer prices broadly. So far, businesses have absorbed the initial shock.

“With inflation about to re-accelerate, as a result of the tariffs that have been imposed, we’re going to see an erosion of disposable income growth,” Daco said.

The status of U.S. tariffs on imports seems to change by the day or even the hour. But some of the Trump administration’s import taxes have been in effect for over a month now. That includes a 25% tariff on some automotive parts. We talked with a small shop not far from the Canadian border about how they’re coping.

Tony Wagner wrote and edited this newsletter. Justin Ho reported our top story on disposable incomes.