US Consumer Spending Surges 0.8% in July, Inflation Rises

American households significantly increased their spending in July 2025, leading to a rise in inflation. The latest report from the Commerce Department indicates that personal consumption expenditures (PCE), which measure household spending, climbed by 0.8% during the month. This figure represents the strongest monthly gain observed in several months, following a 0.6% increase in June.

Services Drive Spending Growth

The surge in consumer spending was primarily driven by a robust demand for services, particularly in areas such as summer travel, healthcare, and dining. Families allocated more resources to housing and vacations, while purchases of goods, including cars and household appliances, showed signs of weakening. The decline in big-ticket item sales points to the impact of rising interest rates, which are making these larger purchases less affordable for consumers.

Inflation also saw an uptick, with the PCE price index rising 0.2% from June and 2.6% year-on-year. Core inflation, which excludes food and energy prices, similarly increased by 0.2% for the month and 2.8% annually. Both measures remain above the Federal Reserve‘s target of 2%, a concern for policymakers as they navigate economic growth and inflationary pressures.

Economic Indicators and Consumer Behavior

Despite the rise in prices, personal income also experienced a boost, increasing by 0.5%. This growth provides households with a degree of financial flexibility, although the savings rate has dropped to 3.4%. The decrease indicates that families are increasingly relying on savings to maintain their spending levels, a trend that raises concerns about long-term sustainability.

Economists attribute the current spending patterns to a combination of factors, including a healthy job market, consistent wage growth, and seasonal summer activities that typically enhance travel and leisure spending. Diane Swonk, chief economist at KPMG, commented, “Consumers continue to fuel growth, but the reliance on savings and credit is unsustainable.” She emphasized that the Federal Reserve must be cautious, as strong demand continues while inflation pressures persist.

The report comes just weeks ahead of the Federal Reserve’s policy meeting in September, complicating its decision-making process. The consistency of core inflation above the target limits the central bank’s ability to implement rate cuts, despite indications from Jerome Powell, the Fed Chair, that they are prepared to respond to softer economic data.

Market reactions to the spending data were immediate. Treasury yields increased, stock prices dipped, and the dollar strengthened as traders adjusted their expectations regarding interest rates, anticipating that they may remain elevated for a longer period.

The US economy has demonstrated unexpected resilience throughout 2025. Consumers have continued to drive economic activity, even in the face of higher borrowing costs and tighter credit conditions. Nevertheless, there are underlying vulnerabilities, including rising household debt and increasing delinquencies on credit cards and auto loans.

Economists caution that a reliance on depleted savings and increased credit cannot sustain momentum indefinitely. Furthermore, external factors such as volatile energy markets and potential supply chain disruptions could further exacerbate inflation challenges in the future.

For now, the data from July highlights that American consumers are still a driving force behind the world’s largest economy. The key challenge for policymakers will be to ensure that this consumer strength does not reignite the inflationary pressures they are striving to manage.