Americans kept spending in July even as inflation remained elevated, according to new government data released Friday.
Consumer spending rose 0.5% from June, the Commerce Department reported. The increase was slightly below expectations of 0.6% but above June’s 0.4% gain, according to FactSet estimates.
July is typically strong for spending, with summer sales and back-to-school purchases, but cars and financial services — supported by a strong stock market — drove much of the growth. When adjusted for inflation, spending rose 0.3%, up from 0.1% in June.
“Consumer spending is solid, and goods inflation remains moderate for now as the tariff war has yet to slow the economy appreciably or lead to a worrisome outbreak of inflation that could worry markets,” Chris Rupkey, chief economist at FwdBonds, wrote Friday.
The Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation gauge, rose 0.2% for the month, keeping the annual rate at 2.6%. Core PCE, which excludes food and energy, increased 0.3% from June and accelerated annually to 2.9% from 2.8%.
Stocks dipped Friday morning but pared some losses after the release. Dow futures fell 100 points, or 0.21%, while S&P 500 futures dropped 0.23% and Nasdaq 100 futures slid 0.44%.
Solid income growth underpinned consumer resilience. Personal income rose 0.4% in July, up from 0.3% in June, while the savings rate held at 4.4%. July was also the first month since March in which monthly spending exceeded income, noted Heather Long, chief economist at Navy Federal Credit Union.
“This is an encouraging sign that American consumers are still willing to open their wallets when they see deals,” Long wrote.
Spending was strongest in durable goods, including cars, appliances and recreational products. Auto purchases played a key role, while inflation-adjusted spending also rose modestly on furnishings, home equipment and recreational goods. July’s 1.9% rise in durable goods was the biggest monthly increase since March, according to Wells Fargo economists Tim Quinlan and Shannon Grein.
They noted that concerns about tariffs’ impact on durable goods may ease after the rebound. However, they also observed that consumers pulled back on discretionary categories such as recreational services, hotels and restaurants.
The inflation pattern in the Personal Income and Outlays report mirrored trends in the Consumer Price Index and Producer Price Index. Prices remain higher than the Federal Reserve’s 2% goal, with businesses gradually passing on tariff-related costs.
“The real hit (from tariffs) is in the next six months,” Long told CNN. She noted that middle-class households lack budget room to absorb higher costs, unlike in 2022 when pandemic savings and stimulus payments provided more cushion.
“A lot of brands and retailers and restaurants were shocked that they could keep raising prices, and people were not pushing back,” Long said. “Now, consumers are pushing back, and that’s a big part of the story.”
Tariffs have not triggered a sharp reacceleration of inflation, partly because companies stocked inventory ahead of the measures, many tariffs were delayed or reduced, exemptions existed, and businesses absorbed some costs in their margins. Still, persistently elevated prices could challenge the economy.
“The United States is entering a stagflation-lite period,” Long said, describing a mix of high inflation, stagnant growth and rising unemployment. She warned that higher costs could prompt companies to cut spending and jobs.
“I do agree that the Federal Reserve needs to cut in September and needs to cut again in December, because while there’s not an inflation crisis brewing, there is a lot of potential for a layoff crisis to start,” she said.
