Consumer Spending Holds, but Inflation Is Doing the Heavy Lifting
Headline numbers look resilient. Real purchasing power tells a different story.
Photo by Tyler Prahm on Unsplash
Consumer spending remains elevated in 2026, but much of the growth reflects higher prices rather than increased volume. Here's what the data actually shows.
The Headline vs. the Reality
Consumer spending figures continue to look solid on the surface. TD Economics now anticipates real consumer spending to climb by 2.8% this year, nearly matching last year's 2.7% gain. That's well above the firm's earlier December prediction for 2.0% growth. But the durability of that headline number masks a crucial distinction: nominal spending can rise even as real purchasing power erodes.
The Bureau of Economic Analysis released its latest Personal Income and Outlays data today, and the timing is relevant. April's CPI report showed the all items index increased 3.8% year over year. Energy prices rose 3.8% in April alone, accounting for over forty percent of the monthly increase. Shelter and food costs added to the pressure. When prices rise faster than consumption volumes, the spending total goes up without households actually buying more.
This is the core tension in the data right now. Spending looks strong because Americans are paying more for the same basket of goods, not because they're filling bigger carts.
Energy and Essentials Are the Story
The inflationary impulse isn't coming from everywhere equally. Energy has been the dominant driver since the conflict in the Middle East began in late February. Goldman Sachs Research notes that Brent crude traded around $100 per barrel as of early May, up from $61 at the end of last year. Their analysts expect energy spending in the U.S. to grow by about 14% this year based on commodity forecasts.
That reallocation is showing up in discretionary cash flow projections. Goldman has twice revised down its 2026 growth estimate for discretionary cash inflow, the amount consumers have left after meeting financial obligations. The current forecast is 3.7%, down from an initial estimate of 5.1%. The firm explicitly attributes the revision to higher gasoline prices.
Food prices are also elevated. The CPI report showed the food index increased 0.5% in April, with food at home rising 0.7%. The Deloitte consumer pulse survey found that 74% of respondents now expect higher grocery prices, up 9 points month over month. These aren't discretionary categories. When essentials absorb more of the budget, something else has to give.
Consumers Are Adapting, Not Thriving
Behavioral shifts are already visible in the data. The Conference Board's Consumer Confidence Index dipped to 93.1 in May from 93.8 in April. The Present Situation Index, which measures consumers' assessment of current business and labor market conditions, retreated by 3.2 points to 121.2. References to prices and oil and gas increased for a second consecutive month in the survey's write in responses.
Two thirds of consumers cited cutting back on spending overall due to rising prices, according to the Conference Board's supplementary questions. This isn't a population that feels flush. Consumer spending trends in 2026 have remained focused on what the survey calls "cheap thrills" and necessary services, with only modest increases in demand for discretionary services like travel and entertainment.
Goldman's consumer research team describes behaviors like putting more clothes in each laundry load to stretch detergent further. That's not expansion. That's conservation. The top line spending number stays intact because prices are higher, but the actual volume of consumption is flat or contracting in many categories.
The K Shaped Divide Is Widening
Not all households are experiencing this squeeze equally. TD Economics characterizes the current environment as a K shape, with higher income households headed one direction and lower income households headed the opposite way. As of Q4 2025, the top 20% of households held nearly 72% of total household wealth.
Middle and high income households account for nearly 80% of all consumer spending. Their financial wellbeing and choices will continue to set the pace for overall consumption. That's why the aggregate number can look healthy even when the bottom of the income distribution is under real stress.
Companies serving true lower income consumers, those that aren't benefiting from trade down behavior from middle income shoppers, have been tougher stocks to own in this environment. The resilience at the top is masking fragility at the bottom. The aggregate spending figure is not the whole picture.
Inflation Expectations Remain Elevated
Consumer sentiment around future prices isn't improving. Deloitte's April survey found that 82% of respondents expect higher gas prices, up 35 points from the prior month. That's the highest reading in three years. Grocery price expectations jumped 9 points to 74%.
The Conference Board reported that consumers' average and median 12 month inflation expectations ticked downward in May but remained elevated. Nearly 50% of consumers said they expect interest rates to be higher over the next 12 months. The ongoing conflict in the Middle East and its impact on energy markets continues to shape these expectations.
This matters for spending behavior going forward. When consumers anticipate higher prices, they may pull forward certain purchases or they may simply tighten budgets preemptively. Either response complicates the read on underlying demand.
What the Setup Looks Like From Here
The spending data will continue to look resilient in nominal terms as long as prices remain elevated. But the market needs to distinguish between strength and substitution. Real consumption growth is the variable that matters for earnings revisions and GDP estimates.
The Fed is watching the same tension. The PCE price index, their preferred inflation gauge, captures changes in consumer behavior and spending patterns across a wide range of expenses. Today's release will update that picture, and the market will parse it for signs of cooling.
What to watch: energy prices, the June 10 CPI print, and any acceleration in the labor market data. If gasoline prices stabilize and shelter inflation moderates, real spending growth could reaccelerate. If they don't, the headline numbers will keep flattering a consumer that's actually just treading water. The [earnings calendar](/earnings-calendar) over the next few weeks will show which retailers are navigating this environment and which are losing share to trade down behavior.
For informational purposes only. Not investment advice. Published Thursday, May 28, 2026.