US Consumer Spending Jumps in July as Services Drive Inflation Higher

American households opened their wallets in July, pushing spending higher and nudging inflation up with it. The latest government data shows that demand for services from summer travel to healthcare is keeping the US economy humming even as borrowing costs rise.

Spending Surge

The Commerce Department reported on Friday that personal consumption expenditures (PCE), the broadest measure of household outlays, rose 0.8% in July. That was the strongest monthly gain in several months and followed a 0.6% rise in June.

Services led the charge. Families spent more on housing, healthcare, dining and vacations, while goods purchases lagged. Sales of cars and household appliances were notably softer, evidence that higher interest rates are making big-ticket items harder to afford.

Inflation also crept up. The PCE price index rose 0.2% from June and 2.6% from a year earlier. Excluding food and energy, core inflation also increased 0.2% on the month and 2.8% annually. Both measures remain above the Federal Reserve's 2% target.

Meanwhile, personal income climbed 0.5%, giving households some cushion. But the savings rate slipped to 3.4%, showing that families are relying more heavily on reserves to keep up their spending pace.

What's Behind the Strength

Economists say the picture reflects a mix of factors: a solid job market, steady wage gains and seasonal summer activity that traditionally boosts travel and leisure. Healthcare costs also added to July's numbers.

'Consumers continue to fuel growth, but the reliance on savings and credit is unsustainable,' said Diane Swonk, chief economist at KPMG, in remarks to Reuters. 'The Fed must tread carefully as demand remains strong while inflation pressures are far from over.'

The consumer sector has long been the backbone of the U.S. economy, making up nearly 70% of GDP. July's data reinforced that, showing households are still carrying much of the weight for overall growth.

Implications for the Fed

The report lands just weeks before the Fed's September policy meeting and complicates its choices. Core inflation's persistence above 2% limits the central bank's room to cut rates, even as Powell and other officials have signalled they are prepared to respond to softer data.

Investors had been leaning toward the possibility of a rate cut later in the year. But July's firm spending and sticky service-sector prices have injected new doubt.

Markets responded in real time: Treasury yields climbed, stocks eased lower, and the dollar strengthened as traders priced in the likelihood that rates will stay higher for longer.

The Bigger Picture

The US economy has shown surprising resilience throughout 2025. Despite tighter credit and high borrowing costs, consumers have kept activity moving. But the foundation is not without cracks. Household debt is rising, and delinquencies on credit cards and auto loans are creeping up.

Economists warn that momentum built on depleted savings and heavier reliance on credit cannot last indefinitely. Risks from outside U.S. borders such as volatile energy markets and renewed supply chain bottlenecks could add further pressure to inflation.

For now, though, July's figures show American consumers are still powering the world's largest economy. The challenge for policymakers is ensuring that strength doesn't reignite the very price pressures they are trying to tame.