The news: Consumer spending held up in October, despite broader signs of growing strain on lower- and middle-income consumers.

• Retail sales rose 3.5% YoY, according to the US Commerce Department.
• Control group sales—which exclude food services, autos, building materials stores, and gas stations, and are used to calculate GDP—increased 0.8% MoM, the biggest rise in four months.
• Sales at nonstore retailers jumped 9% YoY, likely reflecting demand pulled forward by October sales events like Amazon Big Deal Days and Target Circle Week.

Zoom in: A closer look at the data suggests that rising prices, not higher demand, are driving a sizable portion of growth.

• Tariffs have driven up prices across sectors including groceries, apparel, and electronics, costing US households an estimated $1,200 to $1,700 this year, according to separate analyses by Democrats on the US Senate Joint Economic Committee and Yale’s Budget Lab.
• Prices for everyday household purchases, including groceries and personal care items, rose 2.2% YoY in November, according to Numerator.
• The vast majority of consumers—87%—feel they are paying higher prices than usual for groceries, according to an AP-NORC survey. Those concerns are carrying over into seasonal purchases: Nearly two-thirds (63%) have noticed higher prices for holiday gifts.

The labor question: Concerns over declining buying power are being compounded by signs of softness in the labor market.

• The unemployment rate ticked up to 4.6% in November, its highest level in over four years.
• Wage growth cooled more than expected, with average hourly earnings for all employees on private nonfarm payrolls growing by just 0.1% MoM and 3.5% YoY. Economists surveyed by FactSet expected a 0.3% MoM rise.
• Roughly 3 in 5 consumers (61%) believe that prices are rising faster than their pay, including 78% of those with incomes of $30,000 or less, and 74% with incomes between $30,000 and $50,000, according to a CNBC survey.
• Consumers’ “relatively dismal” labor market expectations are one of the many headwinds—including worries over personal finances and “the burden of high prices”—weighing heavily on sentiment, Joanne Hsu, director of the Surveys of Consumers at the University of Michigan, wrote in December’s report.

What to expect in 2026: The US economy appears increasingly fragile. While spending is growing at a healthy pace for now—largely due to higher-income households with a greater capacity to absorb higher prices and a stronger appetite for discretionary purchases—a softening labor market and tariff-driven inflation could push consumers to pull back next year.

• Moody’s Ratings predicts that real consumer spending will fall to 1.5% in 2026 as consumers grapple with job uncertainty and higher costs for healthcare, childcare, and other essentials like utilities and property taxes.
• For our part, we expect retail sales to rise 3.5% next year, in the expectation that wealthy consumers will continue to spend freely, wage growth will continue to outpace inflation, and rate cuts by the Federal Reserve will lower borrowing costs and unlock discretionary spending.