American consumers are pulling back on spending as persistent inflation continues to erode household budgets, raising concerns about the durability of the economic expansion heading into the second half of 2026. New data and forecasts from major financial institutions paint a picture of a consumer sector under increasing pressure.

Inflation Squeezes Household Budgets

According to a recent Fitch Ratings analysis, consumer spending growth is expected to slow to just 1.7 percent in 2026—a significant deceleration from the robust growth seen in previous years. The primary culprit: rising inflation that is shrinking real household purchasing power at an alarming rate.

The May personal consumption expenditures (PCE) data, the Federal Reserve's preferred inflation gauge, showed prices climbing at their fastest pace in three years. Real disposable income—what Americans actually have left to spend after accounting for inflation—fell 0.5 percent in the most recent reading, marking the largest decline in this current period of weakness.

Consumer Sentiment Diverges from Reality

A fascinating disconnect has emerged between how Americans say they feel about the economy and how they're actually behaving. According to J.P. Morgan Chase research, despite consumers expressing pessimism about economic conditions, equities remain near all-time highs and consumer spending, while slowing, continues to tick upward—at least for now.

Real consumer spending rose just 0.1 percent in the latest month, suggesting that while Americans haven't stopped shopping entirely, they are becoming considerably more cautious about their purchases.

The Fed's Hawkish Turn

The Federal Reserve has responded to persistent inflation with an increasingly hawkish stance. Chair Kevin Warsh has signaled that the central bank is prepared to maintain restrictive monetary policy for an extended period, prioritizing the fight against inflation even as consumer spending softens.

The EY economic outlook for June 2026 notes that while consumer spending has remained "resilient," momentum is likely to soften considerably in the second half of the year. The firm points to the Fed's hawkish pivot as a key factor that could further constrain consumer activity.

AI Investment Provides Economic Offset

Not all economic signals are negative. According to U.S. Bank's economic outlook, strength in artificial intelligence-related investment and government spending is helping offset weaker consumer activity. Business investment in AI infrastructure has become a significant driver of economic growth, even as the consumer sector struggles.

However, economists warn that relying too heavily on business investment to carry the economy is a risky proposition. Consumer spending accounts for more than two-thirds of U.S. GDP, making any sustained pullback a potential threat to overall economic growth.

What's Driving Consumer Caution

Several factors are contributing to the consumer slowdown:

Elevated prices: Even as inflation rates moderate from their peaks, prices remain significantly higher than they were just a few years ago.

Depleted savings: The pandemic-era savings cushion that supported consumer spending has been largely exhausted for many households.

Higher borrowing costs: Credit card rates remain near record highs, making debt-financed purchases more expensive.

Labor market concerns: While unemployment remains low, hiring has slowed and wage growth is not keeping pace with inflation for many workers.

Economic Outlook

The U.S. economy finds itself at a crossroads. Nominal GDP is projected to continue rising in the second quarter, reaching approximately $32.75 trillion according to some forecasting models. But the question remains whether this growth can be sustained as the consumer—the engine of the American economy—runs out of fuel.

For now, economists describe the current environment as "good, not great," with consumer spending softening but not collapsing. However, the trajectory heading into the latter part of 2026 will depend largely on whether inflation can be tamed without triggering a broader economic downturn.