The consensus read on the US economy is that it is resilient but cooling, with inflation gradually retreating toward the Federal Reserve’s target. US consumer spending inflation data for August, released by the Bureau of Economic Analysis, makes that narrative harder to sustain. Not adjusted for inflation, consumer spending jumped 0.86% from July and 6.1% year-over-year, reaching an annual rate of $22.3 trillion. Those are not the numbers of a cooling economy.
Wolf Richter, writing for Wolf Street, flagged the distinction that most coverage tends to flatten: adjusted for inflation, the monthly gain was 0.55% and the year-over-year rise was 2.6%. That is the figure most outlets lead with. The nominal figure, 6.1% annual growth, is where the inflation story lives, and it is getting comparatively little attention.
Where US Consumer Spending Inflation Is Actually Concentrated
The composition of spending matters here. Services account for 69% of total consumer expenditure, with housing (17.9% of all spending) and healthcare services (17.3%) dominating. Neither is discretionary; neither responds quickly to monetary tightening. Nominal spending on healthcare services rose 6.8% year-over-year. Financial services and insurance climbed 7.6%. These are not categories where demand softens easily.
Durable goods told a sharper story. Spending on motor vehicles and parts rose 2.5% in August alone and 7.3% year-over-year. Recreational goods and vehicles, the category covering ATVs, motorhomes, video equipment, computers used for entertainment, and similar, rose 2.3% month-on-month and 8.8% year-over-year. Consumers are not pulling back on high-ticket discretionary purchases. That is the part of the demand picture that complicates any argument that the Fed’s work is nearly done.
Gasoline tends to dominate the headlines when prices spike, and in August nominal spending on gasoline rose 4.3% month-on-month and 24% year-over-year. But gasoline accounts for only 2.3% of total consumer spending, up from 1.9% before the recent price run-up. Food and beverages bought at stores account for 7.0%. Together those two categories, the ones most visible in daily life and most politically charged, represent less than a tenth of what Americans actually spend. The economy’s resistance to energy price shocks is, in part, a mathematical consequence of that relatively small combined share.
The Bond Market Is Pricing What the Soft-Landing Narrative Is Not
The bond market appears to be doing its own arithmetic. The 10-year US Treasury yield rose to 5.30% on the day the BEA data was published, its highest level since mid-2007, just before the Federal Reserve’s extended period of rate suppression and quantitative easing began. Yields at that level reflect expectations of sustained inflation and sustained Fed resistance to cutting, not a market pricing in an imminent pivot.
The popular framing is that headline inflation is falling, therefore policy is working, therefore relief is coming. The spending data cuts against at least two of those three steps. Headline inflation may be lower than its 2022 peak, but nominal spending is growing at a rate that keeps real inflation well above comfort. And if spending on services, durable goods, and discretionary experiences is accelerating rather than moderating, the mechanism through which policy is supposed to work (demand destruction) is not obviously in operation.
Richter’s framing is that federal deficit spending, business infrastructure investment, and consumer expenditure form a ‘powerful mixture’ keeping the economy running hot simultaneously on multiple fronts. The bond market, at 5.30% on the 10-year, appears to have reached a similar conclusion. The 10-year yield’s return to pre-financial-crisis norms is the most direct market signal that the era of structurally suppressed rates is being repriced, not temporarily interrupted.
