U.S. Personal Income Rises 0.4% in July, Outpacing Spending Growth

U.S. personal income saw a robust increase of 0.4% in July, surpassing consensus estimates of a 0.2% rise, while personal consumption expenditures advanced by 0.2%, also exceeding the anticipated 0.1%. Including revisions to prior months, consumption climbed by 0.3%. Over the past year, personal income has grown by 3.7%, compared to a 5.9% expansion in spending. Disposable personal income, representing income after taxes, rose 0.5% in July (or 0.6% with revisions) and stands 4.2% higher than a year ago.

Inflation metrics remained a focal point. The overall Personal Consumption Expenditures (PCE) deflator increased by 0.2% in July, maintaining a 3.7% year-over-year growth rate. The "core" PCE deflator, which excludes volatile food and energy components, also climbed 0.2% for the month, reaching 3.3% higher than the previous year. After accounting for inflation, "real" consumption remained flat in July (up 0.1% with revisions) but has increased by 2.1% from a year ago.

Consumers commenced the second half of 2026 on a solid financial footing, driven by healthy income and spending gains. The rise in income was primarily fueled by a 0.3% increase in private sector wages and salaries, which are up 3.8% over the last twelve months. Government transfer payments also contributed significantly, growing 0.6% in July and 5.1% year-over-year. While the 3.8% annual rise in private sector wages appears favorable, it closely mirrors the 3.7% inflation rate over the same period, indicating largely unchanged consumer purchasing power. On the spending side, the 0.2% monthly increase was led by financial services and healthcare, partially offset by a decline in gasoline expenditures. Collectively, goods spending, which includes energy costs, contracted by 0.7% in July, while services spending expanded by 0.6%.

The personal saving rate, which measures the proportion of after-tax income not spent, edged up to 3.0% in July. However, this rate remains near its lowest levels since the COVID-era in 2022, and prior to that, the 2008 Great Financial Crisis. While a lower saving rate can support current spending, its long-term sustainability is questionable.

The Federal Reserve will be closely scrutinizing these inflation figures. The PCE price index, the Fed's preferred inflation gauge, rose 0.2% in July, keeping its year-over-year reading at 3.7%. "Core" PCE prices also increased 0.2% monthly, with the annual comparison now at 3.3%, marking a notable acceleration from the 2.9% pace observed in July 2025. This persistent inflation above the Fed's 2.0% target complicates monetary policy decisions, especially given the inherent lags in policy effectiveness. Monitoring the M2 money supply, which increased 0.4% in July and 5.4% year-over-year, remains relevant, particularly given potential future dynamics like the Treasury General Account (TGA) utilization affecting bond market liquidity, which could influence M2 growth. Currently, expectations are for the Fed to maintain a pause, awaiting clearer signs of sustained inflationary pressures.

Key terms:

1. Personal Consumption Expenditures (PCE): A measure of the goods and services purchased by consumers in the U.S. economy, often used as the primary gauge of consumer spending.

2. PCE Deflator: An inflation measure that tracks the average change over time in the prices paid by consumers for goods and services, considered the Federal Reserve's preferred inflation indicator.

3. Core PCE Deflator: The PCE deflator excluding volatile food and energy prices, used to provide a clearer picture of underlying inflation trends.

Source: This article is adapted from First Trust Portfolios' Data Watch commentary on this data release. The original is available at ftportfolios.com.