Inflation Squeezes U.S. Wallets as Spending Stalls

U.S. consumer spending has lost significant momentum, growing at just a 1.6% annualized rate in the first half of 2025—less than half the 3.6% pace of late 2024—according to TD Economics analysis. Inflation-adjusted consumption has remained flat from December 2024 through July 2025, with recent nominal increases driven entirely by higher prices rather than volume growth.[1] Discretionary categories like travel, recreation, and transportation have seen the steepest declines, as households prioritize essentials amid elevated uncertainty.[1] A weakening labor market exacerbates the slowdown, with hiring stalling and job gains concentrated in few sectors. Inflation-adjusted disposable income growth is projected to decelerate to 1.1% year-over-year by Q2 2026, down from 2% in Q2 2025 and 2.8% in 2024.[1] Core PCE inflation held at 3% annually in February 2025, while consumer expectations for one-year-ahead inflation surged to 3.4% in March, with gas prices anticipated to rise 9.4%.[3] Tariff policy changes have fueled much of the turbulence, prompting early 2025 front-loading of goods purchases followed by a lull. Core goods prices are expected to climb, keeping core inflation above 3% through mid-2026.[1] Energy price spikes since the Iran war's start on February 28 have heightened inflation fears, contributing to real PCE rising just 0.1% in February after stagnating in January.[3] Purchasing power continues to erode, mirroring historical patterns: between 2021 and 2022, a dollar bought 7.4% less due to inflation, dropping to 92.6% of prior value.[2] Real wages lag price increases, forcing longer work hours for the same buying power, while supply chain strains amplify cost-push inflation.[5] High-income consumers have propped up aggregate spending since 2022, but low-income households carry elevated credit card debt compared to 2019 levels.[6]