The pullback in spending is another indicator showing the economy is losing momentum as the Federal Reserve takes action to raise interest rates and combat historically high inflation.

Consumer spending, buoyed by strong job growth and stimulus measures, was the backbone of the country’s economic recovery since a brief recession occurred in early 2020. That strength is fading in the face of the strongest pace of inflation in four decades. “Now consumers are planning to take a back seat,” said

Beth Ann Bovino,

U.S. chief economist at S&P Global Ratings. “How far they’re planning to sit back—it’s still an open question.”

A sharp drop in vehicle sales—due to high prices, low inventory and rising interest rates on car loans—played an outsize role in the decline in month-over-month retail spending. Consumers also pulled back their spending on goods such as furniture, electronics and online purchases.

Higher borrowing costs are hitting the housing market as well, with the National Association of Home Builders reporting Wednesday that confidence among home builders in the U.S. decreased in June for the sixth consecutive month.

More broadly, monthly job gains slowed in May, as did annual wage increases. Consumer spending eased in April and the saving rate fell to the lowest in 14 years, suggesting many Americans are tapping savings to offset cost increases from inflation.

The weaker-than-expected retail sales in May and a downward revision to April spending prompted some economists to downgrade their expectations for economic growth in the second quarter. The economy contracted in the first quarter.

JPMorgan Chase

& Co. analysts lowered their forecast for U.S. gross domestic product growth to an annual rate of 2.5% in the second quarter from 3.25% previously. Data firm IHS Markit cut its growth estimate to 0.9%.

Excluding autos and gasoline, retail sales rose just 0.1% in May, well behind the pace at which prices increased last month. Unlike other reports compiled by the government, retail sales aren’t adjusted for inflation. Soaring gasoline and grocery prices meant households shelled out more on them in May—Americans are spending over 43% more on gasoline than a year ago and nearly 9% more on groceries.

Retail sales were up 8.1% last month from a year earlier, a robust gain but below the blistering pace of inflation, which was up to 8.6% in May from a year earlier, according to the Labor Department’s consumer-price index.

The Fed’s decision Wednesday to raise its benchmark federal-funds rate to a range between 1.5% and 1.75% will make car loans and credit-card debt more expensive in the months ahead. Still, Fed Chairman

Jerome Powell

said he thinks consumers are in good shape, and the economy is well positioned to deal with higher interest rates.

“Overall spending is very strong,” Mr. Powell told reporters, adding the central bank isn’t seeing a broad slowdown. “We see the economy slowing a bit but still at healthy growth levels,” he said.

Consumers are getting less for their money due to rapidly rising prices. The dynamic is also driving a shift from discretionary purchases such as furniture and electronics to essentials like food and gasoline.

The average cost of a gallon of regular gasoline exceeded $4.60 a gallon in late May, up from about $3 a gallon a year earlier, according to the U.S. Energy Information Administration. Prices in June have risen above $5 a gallon.

Logan CoBell, 33 years old, who works in Chicago as a bartender and substitute teacher, said he is driving only for essential reasons, such as commuting to work, to save money on gasoline. He is watching his spending at the grocery store by cutting down on purchases of red meat and opting for cheaper alternatives such as pork and nonorganic chicken.

Mr. CoBell said he was holding off on upgrading to a new computer “so I have cash in hand just in case something weird happens, like another shutdown.”

Companies are struggling with higher inflation, which they say is increasingly hard to pass on to consumers. Some large retailers such as

Walmart Inc.

and

Target Corp.

in recent weeks reported steep profit declines as rising supply-chain, wage and inflation-related costs ate into earnings.

Inflation and high fuel prices are also taking a toll on consumer confidence. Last week the University of Michigan reported that an index of consumer sentiment dropped in June to its lowest point since the inception of the survey in the late 1940s.

Bill Stoops, a 72-year old retiree living in San Diego, said the hit to asset values from financial-market turmoil in recent months means he is pulling in some spending.

“We thought about planning a trip to France and Germany, maybe Italy—we still want to do that but we don’t see it for this year at all,” he said, adding “I’m no longer talking about replacing my current fun car with another fun car.”

Consumers are also continuing to shift spending to services from goods as many Americans resume more in-person activities such as travel and dining out.

The retail sales report mostly covers spending on goods rather than services, but it said that receipts at bars and restaurants were up 0.7% in May, a sign that Americans are continuing to dine out.

Consumer spending accounts for about 70% of U.S. economic output. A strong labor market and rising wages have helped support spending on services, for which there is pent-up demand from the pandemic.

Craig Johnson,

president of Customer Growth Partners, a research and consulting firm, said he anticipates a slowdown in retail spending.

“We’re in a little bit of a watershed in terms of what’s going to happen to the economy,” Mr. Johnson said. “The American consumer—she’s very resilient, but she’s not infinitely resilient.

Write to Harriet Torry at harriet.torry@wsj.com and Rina Torchinsky at rina.torchinsky@wsj.com