Affluent consumers buoy spending

January 22, 2026

Consumer spending rose 0.3% in October and November after adjusting for inflation; whole incomes essentially flatlined. The result pushed down the saving rate to its lowest level during the blistering bout of inflation in late 2022.

Affluent consumers continued to buoy spending with an extra boost from wealth effects. Low- and middle-income households tapped credit and struggled to make ends meet according to consumer attitude surveys. Unemployment rose over the period. Wages and salaries increased, despite the loss in jobs. Wages at the high-end are doing better than the low-end, although a bump in minimum wages showed up across 19 states for an estimated 8.3 million workers in January. As baby boomers age into peak retirement years, many are tapping Social Security benefits early for fear of losing them later. Medicare transfers drove gains in transfer payments.

Spending was broad-based across goods and services. We saw a notable bump in spending on healthcare. It soared at the fastest pace since the height of the Omicron wave of COVID over the summer and continued to bolster service spending in October and November.

Inflation still elevated, despite data problems

The personal consumption expenditures (PCE) index rose 0.2% for both months, despite disruptions and a loss of data due to the government shutdown. The Bureau of Economic Analysis (BEA) went to great lengths to fill some of the gaps due to the shutdown. The PCE, which the Federal Reserve targets, rose 2.7% and 2.8% from a year ago in October and November, respectively, although the data still looks a bit cool. We are holding at the pace hit in September before the shutdown and still well above the Fed’s 2% target.

Used car prices are moving up as new cars have become unaffordable. Vehicle sales will get a bump from tax refunds, which will add to goods inflation in the first half of 2026. The new car market is now dominated by affluent buyers.

Core PCE, which strips out energy and shelter costs, rose 0.2%. That translates to a year-on-year rise of 2.7% and 2.8% for October and November, respectively. We are stuck at the same pace as September.

Utilities prices soared and are poised to move higher. Natural gas prices spiked in recent days as temperatures across the country plummeted. Data centers are stressing the energy grid. The largest tech firms are scrambling to contain their own costs, even reopening mothballed nuclear plants. The backlash for data centers is rising at the state and local levels as home electricity costs soar.

The super core services, which should be less affected by tariffs but are affected by changes in immigration, rose a hotter 0.3% during the two months. That translates to a 3.2% and 3.3% rise from a year ago. We are stuck at September levels, despite some loss of data due to the government shutdown, which suppressed many inputs for the index.

Healthcare and hospital costs jumped, along with financial services. The Fed puts less weight on financial services as that is more a residual of a strong stock market rather than demand pressures. Personal care costs remain elevated.

Food services picked up, reflecting higher food costs and a surge in quits. Quits have ground to a near standstill with the exception of areas with a higher proportion of immigrant labor. Leisure and hospitality saw a surge in quits over the summer and into fall. Some hotels have curbed the frequency of room cleaning, a trend we saw post-pandemic. Food prep personnel are also in short supply.

Airfares dropped, along with an unusual two-month drop in daycare and childcare services. The data on childcare were such an outlier from anything historic that they look to have been suppressed by the loss in data due to the government shutdown. Those costs spiked over the summer.

Childcare has seen a surge in demand due to the rise in the number of births, despite a drop in fertility. The two are not the same. We have a bulge of young adults aging into their peak household forming years and having children. Parental leave in August hit an all-time record for the month; births jumped in recent years. It is a numbers game.