CHICAGO, August 27, 2026– American households showed restraint on consumption at the beginning of the third quarter, owing to the presence of stubborn inflation and a lack of savings over the years. Although personal income saw consistent growth, consumption had to adapt to the economic environment that featured persistently high core price levels.
Spending Stalls as Income Expands
According to official Personal Income and Outlays data released by the U.S. Bureau of Economic Analysis, real personal consumption expenditures remained flat (0.0%) in July. This constant volume marks the weakest monthly performance in consumer activity since January. Consequently, the third-quarter-to-date annualized spending rate slowed to 1.7%. Nominal spending ticked up 0.2% from June, trailing a 0.5% gain in nominal disposable personal income.
As a result, the difference pushed an estimated $89 billion into household balance sheets, increasing the personal saving rate by four-tenths of a percentage point to 3.0% compared to 2.6% in June. It is worth noting that this increase reflects only short-term strength in saving activity and not any long-term changes. The household sector has been gradually reducing its savings rate from a high of 6.4% in January 2024 to finance its day-to-day expenses.
Mixed Progress on Underlying Inflation
In addition to the pullback in expenditures, there was some moderation noted among price measures. The personal consumption expenditures price index registered 0.2% gains in July after falling by 0.1% in June and indicating considerable easing relative to previous periods of stronger pressures. Price growth measured by the headline rate has fallen sharply over shorter windows, from 6.7% annually in April to 0.4% in July.
Nevertheless, wider indicators show that price pressures remain elevated. The six-month annualized rate of headline inflation stayed stable at 4.1%, whereas year-over-year inflation stayed unchanged at 3.7%. Excluding food and energy prices in the core PCE index, it rose 0.2% for the month and had its two-month annualized rate of increase fall to 2.4%. Even though this was the most favorable approach towards monetary goals in over one year, annual core inflation came in at 3.3% and maintained the record of exceeding the 2% target set by the Federal Reserve System in sixty-five consecutive months.
Weakening Sentiment Clouds the Outlook
Declining spending tendencies coincide with growing consumer pessimism concerning the future economic outlook, as measured by consumer research from the University of Michigan Surveys of Consumers. Consumer expectations for the future fell to 68.2 in August, remaining below the key level of 80 for the nineteenth consecutive month. According to economists, falling below that mark indicates historically high recession risks.
Consumer income expectations likewise fell sharply, after several months of increasing expectations and signaling that wages will fail to grow faster than living costs. With no funds left at home and no confidence among consumers, the consumer motor driving growth earlier in the year has a narrow road ahead.
