The Federal Reserve’s preferred measures of U.S. inflation cooled in May and consumer spending stagnated, suggesting the economy’s main engine is starting to lose some momentum.

The personal consumption expenditures price index rose 0.1% in May, Commerce Department figures showed Friday. From a year ago, the measure eased to the slowest pace in more than two years.

Consumer spending, adjusted for prices, was little changed after a downwardly revised 0.2% gain in April. From February through May, household spending has essentially stalled after an early-year surge. Spending on merchandise dropped, while outlays for services increased.

Excluding food and energy, the so-called core PCE price index increased 4.6% from May 2022. That’s in line with annual readings back to late 2022 and shows minimal relief from elevated price pressures. Economists consider this to be a better gauge of underlying inflation.

Under the hood of the government report, a key metric flagged by Fed Chair Jerome Powell showed a welcome slowdown. Services inflation excluding housing and energy services increased 0.2% in May from a month earlier, the smallest advance since July of last year, according to Bloomberg calculations. The figure was up 4.5% from a year ago.

Treasuries and U.S. stock futures rallied. Traders still expect the Fed to resume hiking interest rates at next month’s meeting.

While there are some glimmers of progress in the inflation data, the rate remains well above the Fed’s 2% target. In light of that, central bank officials have signaled they’re anticipating having to increase interest rates two more times this year — potentially beginning with next month’s meeting.

The weakness in consumer spending contrasts with recent data that have otherwise painted a picture of a resilient economy rather than one on the brink of recession. That’s in large part due to the strength of the labor market.

The report indicates slower household spending in the second quarter, Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a note.

“For the Fed, a moderation in consumption will be welcome news as will a deceleration in inflation,” Farooqi said. “However, these developments are not likely to change the very near-term path of policy, with policymakers committed to the view that rates need to rise further, to a more restrictive stance.”

Low unemployment and steady wage growth have allowed many Americans to continue to spend on a range of goods and services despite high prices. Others, however, are struggling. There are signs that households are relying more on credit cards as excess savings from the pandemic dwindle, and delinquency rates are on the rise.

That underlying fragility, paired with an expectation that credit conditions will tighten further, remain key threats for the economic expansion.

The decrease in real spending on goods reflected a drop in purchases of motor vehicles, the report showed. Services spending increased on firmer outlays for international travel and transportation.

Inflation-adjusted disposable income increased 0.3% after falling the prior month. Without adjusting for prices, incomes climbed 0.4%. Wages and salaries advanced 0.5%, the most since the start of the year.

The June jobs report, out next week, will be one of the other marquee releases the Fed will have before its July 25-26 meeting. Policymakers will also get updated figures on consumer and producer prices as well as retail sales.

The saving rate rose to 4.6%, matching the highest since January 2022 and suggesting Americans are growing more cautious in their spending habits.

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