Personal income and spending August 2025

A smaller share of consumers eating a bigger share of the pie

Not all households are weathering the tariff storm equally. Aggregate consumer spending gives the appearance of broad-based consumer resilience, but a silent majority is increasingly feeling the strain of higher grocery, furniture, auto and services prices. Real consumer spending rose a healthy 0.4% month over month (m/m) in August, but it was largely driven by stronger spending on travel, leisure and dining out, along with wild swings in spending on durable goods — for which volumes remain lower than in December 2024. Incorporating annual national income accounts revisions, real disposable income growth remained flat at a moderate 1.9% year over year (y/y) pace while real consumer outlays growth picked up to 2.7% y/y.

Many consumers are increasingly feeling the strain of elevated prices and slowing income growth, prompting them to draw down savings and rely more heavily on credit to sustain their spending. In contrast, higher-income households appear to be spending more freely, buoyed by solid income gains and robust wealth effects from equity market appreciation.

Core personal consumption expenditures (PCE) inflation held steady at a seven-month high of 2.9% y/y in August, driven by automotive prices, groceries and transportation costs. Headline PCE inflation ticked up to 2.7% y/y. As businesses exhaust their pricing workarounds, the tariff pass-through will intensify in the coming months. We expect core PCE inflation — the Fed’s preferred gauge — to trend higher, likely reaching 3.2% by year-end, further complicating the consumer outlook amid softening labor market dynamics.

Key takeaways

• Income is slowing. Personal income increased 0.4% m/m in August on a moderate 0.25% rise in wages and salaries. With PCE inflation rising 0.3% m/m, real disposable income only rose 0.1%. Looking at the momentum, real disposable income growth has slowed from 2.8% in August 2024 to 1.9% y/y in August 2025, and it’s poised to decelerate further in H2 on weaker employment and reduced wage growth.
  
  
• Consumers are dissaving. With personal outlays outpacing income, the personal savings rate fell 0.2 percentage point (ppt) to 4.6%. Following a spike to 5.7% in April — that coincided with the announcement of the Reciprocal Tariff Policy — the savings rate has declined 1.1ppt, pointing to more consumers using their savings buffer to offset rising costs.
  
  
• The annual National Income and Product Accounts (NIPA) revisions suggest stronger spending in Q3. Real consumer spending rose to a solid 2.7% y/y in August, up from the previous 2% estimate, while real disposable income grew 1.9% y/y, nearly matching its pre-revision pace. With these revisions, consumer spending is now expected to rise at a 3% quarter-over-quarter annualized rate in Q3, up from 2% previously, implying upside risk to our Q3 GDP forecast.
  
  
• Households are trying to push through. Real consumer spending growth points to ongoing resilience at 2.7% y/y in August, but it has nonetheless slowed from 3.6% y/y in December. In August, spending on durables rose a healthy 0.9% m/m, led by a summer surge in demand for recreational vehicles, while spending on autos fell, and spending on furniture remained subdued amid elevated and rising prices. Spending on nondurable goods rose a solid 0.5% on a strong rise in summer apparel demand and more people filling up at the gas station for their road trips. Concerningly, though, spending on groceries eased.
  
  
• Higher-income families driving services. Spending on services rose a moderate 0.2% in August, consistent with the trend over the past four months, led by gains in travel and leisure. Notably, spending on housing and utilities declined for a second consecutive month, down 0.1%, possibly reflecting financial pressures on lower-income households amid elevated energy and housing costs. In contrast, higher-income consumers appear to be spending freely: outlays at restaurants, bars and hotels rose 0.3% m/m; transportation spending increased 1.1%; and spending on recreation services surged 1.5%.
  
  
• Prices are rising at a store near you. The headline PCE deflator rose 0.26% m/m in August while core PCE advanced 0.23%. As a result, headline PCE inflation rose a tick to 2.7% y/y while core inflation remained unchanged at 2.9% y/y — a seven-month high. Looking into the details, car and furniture prices are swinging wildly from month to month but generally rising under the impulse of tariffs. Similarly, grocery price inflation is picking up. On the services front, shelter cost disinflation remains in place, but transportation cost inflation is reaccelerating while restaurant price inflation is picking up.
  
  
• Fed rate cuts won’t be front-loaded. While markets remain buoyed by Fed rate cut “hopium,” we believe most policymakers favor a cautious approach to easing. With inflation firming and consumer spending holding up, the September jobs report will take on added significance. A payroll gain above 50,000 could prompt some officials to push back against an October cut following September’s risk-management-driven move.

Bottom line: The illusion of broad-based consumer strength masks an increasingly polarized market. High-income households continue to drive discretionary spending, while a growing share of consumers cut back amid slowing income growth and rising prices. As the tariff pass-through accelerates and inflation trends higher, businesses face a challenging mix of margin compression and uneven demand. To navigate this environment, business leaders must adopt a more segmented approach — tailoring pricing and product strategies by income tier, refining demand forecasting, and investing in automation and productivity-enhancing technologies to offset rising input and labor costs. Agility, precision and operational discipline will be key to sustaining performance as consumer behavior becomes more fractured.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.