July Data Show Inflation Still Squeezing Consumer Spending

A Mixed Economic Signal in July

New Commerce Department figures released this week paint a picture of an economy caught between resilience and strain. Incomes are still climbing at a solid pace, but inflation remains stubbornly elevated and consumer spending has visibly lost steam, according to the latest data 1. Consumer spending rose just 0.2 percent in July, a slight step down from 0.3 percent growth in June, underscoring how price pressures continue to weigh on household budgets 4. When adjusted for inflation, real spending was essentially flat for the month, even as the annual rate of inflation measured by the Personal Consumption Expenditures (PCE) index came in at 3.7 percent 5.

Consumers Pull Back, But Not by Choice Alone

Multiple outlets framed the July report the same way: Americans reined in their spending as inflation remained sticky 35. That pullback comes alongside a notable shift in household behavior — the personal saving rate ticked higher in July, suggesting consumers are growing more cautious and setting aside more of their income rather than spending it freely 5. This marks a departure from the spending-heavy pattern that has defined much of the post-pandemic economy, in which Americans have consistently outspent what they earn.

A Record Streak of Spending Beyond Income

That imbalance between earnings and expenditures has now stretched to a striking milestone. Analysis from Charles Schwab, highlighted in coverage of the data, shows that real disposable income has trailed consumer spending for a record 25 consecutive months as of July 2. In other words, even as nominal incomes rise, inflation-adjusted purchasing power has not kept pace with how much households are actually spending — a dynamic that has fueled concerns about how sustainable consumer-driven growth can be if wage gains keep losing ground to prices.

Why It Matters

Consumer spending accounts for roughly two-thirds of U.S. economic activity, so any cooling trend carries outsized weight for growth forecasts. The combination of solid income growth, persistent inflation, slowing spending, and a rising savings rate suggests households are adjusting their behavior in real time rather than retrenching outright. Still, the fact that spending has outpaced income for over two years running raises questions about how long that cushion — built partly on savings drawdowns and credit — can last.

What Comes Next

The July snapshot arrives just as investors and policymakers brace for additional readings on consumer confidence and inflation, which are expected to further shape expectations around interest rates and the broader economic outlook 6. With inflation still running well above the Federal Reserve's 2 percent target and consumers showing early signs of pulling back, the coming weeks of data will be closely watched for confirmation of whether this is a temporary soft patch or the start of a more meaningful slowdown in household demand.