Checking in on US Consumers

Since oil and gas prices surged, headlines warned hot inflation would quash spending. And with it, GDP and stocks. Yet six months in, the fear isn’t coming true. The latest evidence? August’s US personal consumption expenditures (PCE) report—consumer spending and the Fed’s target inflation measure. The results were grand—fast spending growth and slower-than-thought inflation. Yet headlines dismissed the good news and kept pumping the same old fears. To us, this points to a persistent gap between sentiment and reality—bull market fuel.

Given today’s zeitgeist, we start with inflation. The headline PCE price index rose 3.4% y/y in August while core (excluding food and energy prices) increased 3.0%.^[i] Both matched July’s readings, which were downwardly revised from 3.7% y/y and 3.3%, respectively. These are nice shifts from the reheating inflation reported initially. They are also well below May’s highs, continuing a cooldown.

Considering the Fed targets 2% inflation, these readings are still warm. No one likes paying higher prices. But crucially, it remains an oil and gas story. Services inflation rose 3.4% y/y, matching July and the trend since 2024.^[ii] But gasoline and other energy goods’ 27.9% y/y jump lifted goods inflation to 3.6% y/y from July’s 3.3%. Clearly, the war continues skewing inflation.

But higher energy prices still aren’t leaking elsewhere. PCE excluding energy rose 2.9% y/y in August, extending the trend since 2024’s start. During 2022 and 2023’s hot inflation, that category ranged from 4.0% to 6.0% y/y.^[iii] Inflation rates in non-energy goods and services (e.g., food, clothing, housing, health care) categories didn’t spike, either. Non-energy inflation continues moderating from postpandemic highs, defying pundits’ worries around energy prices’ spilling elsewhere.^[iv] Lingering fear indicates stocks still have an inflation brick in the wall of worry.

As for spending, real (inflation-adjusted) PCE rose 0.6% m/m (2.6% y/y) in August, speeding from July’s 0.1% and the fastest growth since March 2025.^[v] But this wasn’t about gas station spending. Spending on gasoline and other energy goods stalled, while transportation services (e.g., car rentals, airlines, taxis) spending slowed to 0.2% m/m from July’s 0.4%.^[vi] Unsurprisingly, rising fuel prices prompted conservation. Many treat gas consumption as constant, but there are many discretionary trips US consumers make—and can curtail. That is on display here.

August’s report also showed more substitution, when people cool luxury spending amid higher energy costs. Spending slowed or fell in some big-ticket goods and services, like computers, jewelry and watches and gym memberships.^[vii] Yet other discretionary spending was healthy: Purchases of TVs, software, autos and home furnishings sped. Americans are seemingly substituting purchases on an industry-by-industry basis.

Between conservation and substitution, consumers are making choices tied to higher gasoline prices. But they aren’t making draconian cuts. Spending isn’t just growing, it accelerated. No, consumer spending isn’t a major economic swing factor. Much of it goes to essentials, which people buy in good times and bad. But this doesn’t look like swooning discretionary demand signaling a recession.

August’s PCE report extends the trend economic reality beating expectations since the war erupted. And since 2025’s tariffs hit. And before that, when prices surged in 2022 and we didn’t get a recession (though we did get a shallow, sentiment-induced bear market that energy worries contributed to). Like corporations and governments, consumers are adapting to higher energy prices to keep the economy ticking. And outside energy, prices are mostly moderating—helping ease the pressure.

From an investing perspective, pundits’ reaction here was most telling. Their suggests sentiment hasn’t yet caught onto consumers’ fine health. Stocks’ wall of worry still has plenty of bricks.