Consumer outlook sours as inflation expectations rise, New York Fed survey finds

A New York Federal Reserve survey indicates rising consumer concern over financial stability and higher inflation expectations, leading to a decline in household spending growth forecasts, exacerbated by increasing grocery costs (up 2.7% annually in August). Despite this cautious outlook, a KPMG report projects selective increases in holiday spending; however, this is tempered by surging credit card balances, which reached $1.21 trillion in Q2 2025, signaling growing consumer financial strain amidst mixed spending signals.

Analysis

Americans are increasingly concerned about their financial situation amid expectations that inflation could pick up, according to a New York Federal Reserve survey released Tuesday. The central bank’s monthly Survey of Consumer Expectations found that consumers expect inflation to be higher in the year ahead, and fewer expect their households’ financial situations to be better off a year from now. Household spending growth expectations also declined, the New York Fed’s survey found. More from Personal Finance: Consumers’ top pain points: groceries and gas How a government shutdown may affect your money How workers can prepare financially for a government shutdown While many Americans have expressed worries about rising prices and the effect of President Donald Trump’s tariff policies, few have changed their spending habits yet. Up until now, experts say, that is what has helped the U.S. avoid a significant economic slowdown. But Americans are having a harder time keeping up, other research shows. High food costs, in particular, make it more difficult to cover expenses in a typical month. Grocery prices rose by 2.7% in August from a year earlier, the fastest annual pace since August 2023, according to the latest consumer price index. “Few things drive Americans’ perception of the economy more than grocery prices,” said Matt Schulz, chief credit analyst at LendingTree. “If people are convinced that those are just going to keep rising, it stands to reason that fewer people would think that their own household’s financial situation would be better off a year from now.” ‘A complex set of uncertainties’ Despite the cautious Fed outlook, a separate report by KPMG shows consumer spending is set to increase heading into the peak shopping season at the end of the year. “The consumer is spending like a poker player with a small chip stack,” Duleep Rodrigo, KPMG’s U.S. consumer and retail leader, said in a statement. “They know they can’t play every hand but are willing to go ‘all in’ on a promising hand with a high emotional payoff,” he said of projections that holiday spending will increase compared to last year. “There’s also a psychological element where the consumer is managing a complex set of uncertainties,” Rodrigo said. At the same time, credit card balances are edging higher, according to other research on household debt by the Federal Reserve Bank of New York, indicating that more consumers are are struggling to manage their expenses. Balances reached a collective $1.21 trillion in the second quarter of 2025 — up 2.3% from the previous quarter and in line with last year’s all-time high. Consumer sentiment indicates a growing apprehension regarding financial stability, with the NY Federal Reserve's Survey of Consumer Expectations revealing higher inflation expectations and a decline in future household financial outlook. This caution is notably driven by rising grocery prices, which increased 2.7% year-over-year in August, the fastest pace since August 2023, heavily influencing consumer perception of the economy. Despite these concerns, a KPMG report projects an increase in selective consumer spending for the upcoming peak shopping season, characterizing current behavior as a "poker player with a small chip stack" willing to go "all in" on high emotional payoff items. This suggests a nuanced consumer approach, where discretionary spending might be prioritized even amidst broader financial anxieties and a "complex set of uncertainties." However, underlying financial strain is evident as credit card balances reached a collective $1.21 trillion in Q2 2025, up 2.3% from the previous quarter and near an all-time high. This increasing reliance on credit indicates that many consumers are struggling to manage their expenses, raising concerns about the sustainability of future spending and the overall health of household balance sheets.

Key Decisions for Investors

• Investors should closely monitor consumer staple companies for margin pressures from sustained grocery inflation, while discerning between resilient discretionary spenders and those vulnerable to escalating household debt.
• Evaluate credit card issuers and consumer lending institutions for potential increases in default rates given the record high credit card balances, indicating heightened consumer financial strain.
• Consider a bifurcated retail strategy, focusing on companies that cater to 'high emotional payoff' purchases or essential goods, while exercising caution on broad-based discretionary retail exposed to general economic slowdowns.