Inflation Surge Forces Americans to Retrench on Spending

The cracks in consumer resilience are widening. Personal consumption expenditures inflation climbed to 2.9% year-over-year in December 2025, the highest level in two years, while core inflation—excluding food and energy and closely watched by the Federal Reserve—held at 3%, well above the Fed's 2% target.[1] The damage extends beyond price tags: consumer sentiment has deteriorated sharply, with one-year inflation expectations surging from 3.8% in March to 4.8% in April, marking the steepest monthly increase since April 2025.[2] Meanwhile, consumers' assessments of personal finances declined about 11%, with substantially increased concerns about high prices and weakening asset values.[2] The pain is not distributed equally. The lowest-earning 60% of Americans are no better off than they were three years ago, while real consumer spending has actually declined for low-income households since 2023 even as high-income households have continued to expand their spending.[1] Prices for essential goods—food items and utilities—have risen sharply, hitting low-income families particularly hard at a moment when the labor market has softened for low-wage workers.[1] According to the Federal Reserve's January 2026 Beige Book, low- and moderate-income consumers are becoming more price-sensitive and exercising greater caution in spending on nonessentials, intensifying value-seeking behavior across grocery, retail, restaurants, and automotive sectors.[1] Retailers face a bifurcated consumer base. As spending by low- and middle-income households likely contracts under the weight of rising inflation and slowing job growth, the overall economy is becoming dangerously reliant on high earners to drive demand.[1] Consumer Price Index data from March 2026 showed the all-items index rose 3.3% over 12 months, driven partly by energy prices that surged 10.9% for the month, with gasoline alone jumping 21.2%.[3] Buying conditions for durable goods and vehicles have deteriorated again on the basis of high prices, according to consumer surveys.[2] The concentration of spending power among the wealthy creates a new vulnerability. Any sharp decline in asset prices due to financial or economic shocks could trigger a cascading negative wealth effect on overall consumer spending.[1] High-income households themselves may shift toward value-seeking behavior if asset prices fall, particularly affecting younger families with six-figure incomes whose confidence in retirement readiness and lifestyle maintenance could be shaken.[1] This tighter, more fragile consumer base stands in stark contrast to the broad-based spending that fueled growth in prior years. The divergence between income groups raises questions about the sustainability of economic expansion. While Deloitte's financial well-being index shows that well-being improved for high-income individuals compared with 2023, middle- and lower-income households saw financial well-being drop in 2025, reversing gains from previous years.[1] Long-run inflation expectations have also ticked up to 3.4%, the highest reading since November 2025, suggesting consumers fear price pressures will persist beyond the near term.[2] Policymakers and business leaders are watching closely whether the current spending patterns can hold or whether a broader consumer pullback awaits.