Consumers Now Remain Cautious Amid Inflation Concerns

American consumers continued to fuel the US economy in July, with retail sales rising a solid 0.5% amid ongoing concerns over President Donald Trump’s tariffs and fluctuating confidence levels.

This spending, which accounts for roughly 70% of the nation’s economic output, underscores a resilient consumer base even as inflation expectations climb and businesses navigate higher costs.

However, recent data reveals cracks in the foundation, with consumer sentiment falling sharply and producer prices jumping more than anticipated, raising questions about how long this momentum can last.

The Commerce Department’s latest report shows retail and food services sales reached $726.3 billion in July, up from June’s upwardly revised 0.9% gain and aligning with economist forecasts.

This marks the second straight monthly increase, following a spring slowdown, and highlights broad-based demand across key sectors.

Retail spending showed strength in several categories, buoyed by promotions and seasonal events like Amazon’s Prime Day:

Auto Dealers and Furniture Stores Lead Gains: Sales at car dealerships climbed 1.6%, while furniture stores saw a 1.4% increase, reflecting robust demand for big-ticket items.
Online and Gas Station Boost: E-commerce sales jumped 0.8%, and gas stations reported higher spending, contributing to the overall uptick.
Declines in Select Areas: Not all sectors fared well—home improvement stores dropped 1%, electronics retailers fell 0.6%, and restaurants/bars extended a weak streak with a 0.4% decline.

The “control group” measure—excluding volatile items like autos, gas, building materials, and food services—rose 0.5%, slightly beating expectations of 0.4% and signaling underlying consumer demand remains healthy.

Adjusted for inflation (with the Consumer Price Index up 0.2% monthly), real retail sales still advanced 0.3%.

Over the May-July period, sales were up 3.9% year-over-year, though momentum is cooling from earlier peaks.

Economists note that while tariffs are starting to bite, consumer resilience—supported by low unemployment at 4.2% and steady jobless claims—has kept the economy afloat.

Consumer Sentiment Takes a Hit Amid Inflation Worries

Despite the spending surge, Americans are growing wary.

The University of Michigan’s preliminary August Consumer Sentiment Index fell 5% to 58.6, down from 61.7 in July and below forecasts of around 62.

This marks the first decline in four months, with current conditions dropping sharply to 60.9 from 68.0.

Inflation expectations are fueling the unease:

One-year ahead: Rose to 4.9% from 4.5%.
Five-year ahead: Climbed to 3.9% from 3.4%.

“Consumers are no longer bracing for the worst-case scenario… but continue to expect both inflation and unemployment to deteriorate,” said Joanne Hsu, director of the University of Michigan survey.

Historically, sentiment has been a poor predictor of actual spending, as seen in 2022 and 2023 when low confidence didn’t halt robust purchases.

On X, reactions highlight growing concerns.

One user noted, “1970s #Stagflation in making a comeback… Companies will shift the burden onto consumers in Q3/4,” citing recent jobs and inflation data.

Another pointed to persistent cost pressures: “Rents up 30%, Groceries + utilities up 20–25%… Costs are up — and nothing’s coming down.”

Businesses Adapt, But PPI Surges

President Trump’s tariffs, expanded earlier this month, haven’t yet triggered widespread inflation, thanks to business strategies outlined in a Richmond Fed report.

Companies have delayed inventories, negotiated cost-sharing, and stockpiled goods to blunt effects.

Layoffs remain minimal, with jobless claims low and unemployment steady.

However, the Producer Price Index (PPI) jumped 0.9% monthly in July—the largest in three years—pushing the annual rate to 3.3%, far above expectations.

Core PPI hit a three-year high, driven by surges in goods and services.

Richmond Fed economists warn that tariff impacts are “lagged but starting to play out,” with uncertainty for consumer prices.

X users echoed this, with one analyst warning of “much BLEAKER picture” from tariffs, estimating $108 billion annual GDP hit or $861 per household.

Another highlighted job losses: “Since April 2025, 37,000 manufacturing jobs vanished.”

Expert Views: Spending vs. Sentiment Disconnect

“What consumers do is more important to the economy than what they say,” noted Bill Adams, chief economist at Comerica Bank.

Chris Zaccarelli of Northlight Asset Management added, “As long as consumer spending holds up… the flywheel can continue to spin, pushing corporate profits and stock prices higher.”

Markets are pricing in a 93% chance of a Federal Reserve rate cut by year-end, amid mixed signals like stronger small business optimism (NFIB index at 100.3) and a 90-day US-China tariff truce extension.

Yet, with household debt at $18.39 trillion and delinquencies rising, some warn of weakening demand.

Key Economic Indicators (July/August 2025)	Value	Change	Notes
Retail Sales (MoM)	+0.5%	Down from +0.9% in June	In line with expectations
Control Group Sales (MoM)	+0.5%	Beats 0.4% forecast	Excludes volatiles
Consumer Sentiment (Preliminary Aug)	58.6	-5.0% from July	Below forecast
PPI (MoM)	+0.9%	Highest in 3 years	Annual: 3.3%
Unemployment Rate	4.2%	Steady	Low jobless claims