U.S. Income and Spending: Inflation Progress Amid Spending Stall

The U.S. Income and Spending report revealed headline inflation trends cooling in the last couple of months relative to higher price pressures in the immediate aftermath of the Iran War. The personal consumption expenditures (PCE) price index rose 0.2% month-over-month (MoM) in July after a 0.1% MoM decline in June. This is a noticeable contrast relative to the prior monthly run rates in March (0.7%), April (0.4%) and May (0.5%) and the MoM average over the previous five years (0.3%). Shorter-run PCE price trends have decelerated sharply: two-month annualized from April’s 6.7% to July’s 0.4% and three-month annualized from May’s 6.4% to July’s 2.2%. However, the smoother six-month annualized rate remained at an elevated 4.1%, and the year-over-year (YoY) rate was steady at 3.7% for a second straight month.

The underlying core PCE price index showed the same pattern as the headline figure in the last two months. July’s 0.2% MoM gain after June’s 0.1% MoM advance was in stark contrast to the 0.3-0.4% run rates exhibited from December 2025 to May 2026 and the 0.3% average over the previous five years. Given the recent core cooling, the two-month annualized rate eased to a 2.4% pace, the lowest, less than half February’s 5.2% local high and the lowest level since April 2025. While this is the best progress toward the Fed’s 2% inflation target in over a year, other inflation trends continue to have 3-handles: 3.0% three-month annualized; 3.5% six-month annualized; 3.3% YoY rate. Moreover, the annual core PCE inflation rate has been above the Fed’s 2% target for 65 months in a row.

The consumer spending picture stalled in volume terms at the beginning of the third quarter. Real personal consumption expenditures were unchanged MoM in July. This marked the softest consumer performance since January’s 0.2% MoM decline. To be sure, real consumer spending was revised up slightly in the second quarter from a 3.2% quarter-over-quarter annualized rate to 3.4%. With one month on the books, the third quarter-to-date annualized rate is starting out at 1.7%, half that of the prior three-month period.

Nominal consumer spending rose 0.2% MoM, less than the 0.5% sequential increase in nominal disposable personal income (DPI). In dollar terms, spending underperformed DPI by about $89 billion, the same amount of the increase in personal saving from June to July. These dynamics produced a four-tenth rise in the saving rate to 3.0% from 2.6% in the previous period.

The July saving rate uptick should be viewed as a brief pause in an otherwise downward sloping path. To maintain spending in the last few years, consumers have whittled down the saving rate over time from the January 2024 high of 6.4% to the current level that is less than half that figure. Historically, a falling saving rate usually is a reflection of buoyant consumer confidence and optimistic income expectations. Neither were on display in Tuesday’s Conference Board Consumer Confidence report for August. This suggests that the lower trend in savings likely is not voluntary.

Forward-looking Consumer Expectations fell to 68.2, remaining below the 80 level for a 19th consecutive month. Conference Board considers this threshold a warning flag that points to heightened consumer pessimism and elevated risk of a near-term economic downturn. Conference Board’s Income Expectations, a subcomponent of Consumer Expectations, provides a focused viewpoint on the outlook for consumer spending. August’s 3.1-point fall to a net 3.8 fully arrested the improvement in the 15 months ended June 2026. This suggests a more cautious near-term spending outlook should be warranted.

The personal income and consumption figures are available in Haver’s USECON database with detail in the USNA database. The Action Economics forecasts are in AS1REPNA.