The news: Consumers pushed through rising prices in August to drive retail sales up 6.0% YoY and 1.2% MoM, per the US Census Bureau, outpacing inflation and easily topping the 0.8% MoM median estimate in a Bloomberg survey of economists.

The so-called control group—which excludes food services, auto dealers, building materials stores, and gas stations—rose 4.8% YoY and 1.4% MoM, its strongest monthly increase in nearly two years.

All 13 categories tracked by the Census Bureau posted YoY gains, led by gas stations (21.0%), miscellaneous retailers (14.0%), and nonstore retailers (9.9%). Twelve of the categories also grew MoM.

What this means: The K-shaped spending divide has narrowed.

Discretionary spending rose 5.9% YoY among higher-income households, versus 5.7% among lower-income households, per Bank of America data. That was the smallest gap since January 2024, helped by stronger wage growth among lower-income workers.

But resilience doesn’t mean consumers are spending indiscriminately. During the back-to-school season, spending shifted away from teen and children’s apparel retailers toward lower-cost big-box stores and wholesalers.

And while the K-shaped divide may be fading for everyday spending, it remains firmly in place for bigger-ticket purchases that consumers typically finance, such as homes and cars. Weakness in those categories ripple across the broader economy as home purchases generate demand for furniture, appliances, and moving services, while vehicle purchases support spending on accessories, insurance, maintenance, and other services.

The headwinds facing big-ticket purchases are growing more intense after the Fed raised interest rates on Wednesday for the first time in three years.

Implications for the holiday season: August’s strength doesn’t mean consumers will spend freely through the holidays, particularly as higher energy and borrowing costs squeeze budgets.

Consumers’ gift budgets are 1.8% smaller than last year, per a PwC consumer survey. And InMarket found that 70% plan to adjust their holiday spending, with 47% of those consumers expecting to buy fewer gifts and 41% shopping for fewer people.

Our forecast reflects that caution, while also accounting for the fact that what consumers say they’ll spend doesn’t always match what they ultimately spend. We expect total holiday sales to grow 4.1% YoY, 20 basis points below the 2026 full-year average. Excluding autos and gas, growth slows to 3.4%, below the 3.8% full-year average.

In that environment, retailers can coax cautious shoppers to spend with compelling promotions and small indulgences at accessible price points. The goal is to make holiday purchases feel affordable enough to justify and appealing enough to splurge on.