Cooling inflation and AI-driven earnings momentum helped push the S&P 500 and Russell 2000 to record highs. However, the week’s trading closed on a cautious note as retail sales fell in July, a potential sign consumer budgets may be getting squeezed by higher prices. Although sentiment has tilted increasingly bullish as of late, on-going Middle East tensions could potentially stoke more inflationary pressures that could weigh on consumers.
Key Highlights:
- The Consumer Price Index (CPI) rose 0.10% in July, bringing the annual rate to 3.40%. Excluding volatile food and energy, core CPI was up 0.20% for the month and 2.50% year-over-year (YOY). The decline was driven by prices moderating across a range of goods and services. Still, core CPI remains above the Fed’s 2.00% target level suggesting the central bank will continue to hold interest rates steady.
- Moderating price pressures at factory gates gave some glimmers of hope that inflation could be easing for consumers. The Producer Price Index (PPI) was unchanged in July, following a 0.10% decline in June. Meanwhile, core PPI rose 0.20% month-to-month. YOY, the headline figure was up 4.70% and 4.20% for core.
- Retail sales unexpectedly fell 0.6% in July, a big miss compared to analysts’ forecasts for a 0.1% gain. That was down sharply from June’s 0.2% gain. July’s drop was also the steepest decline since May 2025. A 0.90% drop in sales at gas stations drove the headline figure lower. However, excluding gas station receipts, sales for the month were still down 0.6%. A drop in sales for autos, online stores, and electronics more than offset gains in restaurants and brick and mortar stores.
Market Bulls Ride Cooling Inflation and AI Momentum to Record Highs
Records continued to fall with both the S&P 500 and small cap Russell 2000 index finding a new gear to hit new all-time highs this week. However, the Dow Jones Industrial Average struggled, slipping 0.56%. Cooling inflation and robust AI driven earnings momentum continue to support tech and small cap names. Signs of moderating inflation should help keep the heat off the Fed to lift interest rates to combat high prices but cuts still remain a ways off. July’s retail sales print lent further support for the central bank to hold rates steady in a potential sign of cooling consumer spending. The Dow, however, trailed the S&P 500 and Russell 2000, slipping on a renewed rebound in crude oil prices amid on-going Middle East tensions and a surprise July retail sales report that did not sit well with the economically sensitive index. Benchmark West Texas Intermediate Crude added about 5.5% for the week as the Strait of Hormuz continues to largely be closed to traffic with confusion around whether the U.S. or Iran holds control of the vital waterway. As oil prices have moved higher, consumers appear to be getting squeezed with July retail sales down 0.6%. With consumers accounting for two-thirds of economic growth and a renewed rebound in oil prices, U.S. economic momentum could potentially slow and throw a wrench in the cooling inflation trend. Inflation remains highly sensitive to developments in the Middle East and consumers seem to finally be responding to that sensitivity, particularly for disruptions to energy supply and shipping. Thus far, oil price increases have been largely contained as global economies have been able to weather the supply shock by tapping reserves. However, a more prolonged war could test that strategy, sending oil prices and inflation higher. For the time being, markets appear to be assigning a low probability to a severe and sustained energy supply disruption. Instead, they remain focused on positive signs of cooling inflation and strong earnings visibility to keep the market rally going.
The Week Ahead
Key reports include housing starts and S&P flash PMIs.
Digging into a Declining U.S. Personal Saving Rate
The U.S. personal saving rate is a measure of how much income households are setting aside rather than spending. To calculate the U.S. personal saving rate, the Bureau of Economic Analysis (BEA) begins with the total income households receive after taxes, then subtracts what households spend on goods and services. What remains is personal saving as a share of disposable personal income, a figure that has been tracked since the 1950s. This is a broad national measure that encompasses investment and retirement saving, debt reduction, and other forms of saving. The U.S. personal saving rate sits at a four-year low.
According to the BEA, the U.S. personal saving rate declined sharply in the first half of 2026. It fell to 2.7% in June 2026 which was down from roughly 4.5% in January 2026. This is well below the 6.1% pre‑pandemic average (2015–2019) and below the 30-year average of 5.7%, meaning that the most recent reading is less than half of the long-run norm. The personal saving rate reached its historic high in April 2020 during the pandemic when it rose to 31.8% due to lockdowns that curtailed consumer spending and due to government stimulus payments and expanded unemployment benefits that boosted household disposable incomes.
Economists note that the downward saving trend is being driven by high fixed costs and inflationary pressures. Since 2021, housing, groceries, insurance, and childcare costs have risen faster than wages. These fixed expenses absorb more of each paycheck, particularly for lower-income households, leaving less room for discretionary saving. Yet, despite this cost-of-living squeeze, the most recent consumer spending report found that consumer spending, measured as personal consumption expenditures (PCE), rose 0.3% in June after increasing 0.9% in May. The American consumer continues to spend at a pace that outstrips income growth. The consumer appetite for spending comes at the cost of not only drawing down savings but also accumulating debt. Americans are currently carrying a record level of credit card debt — $1.263 trillion as of the second quarter of 2026, according to the latest data from the Federal Reserve Bank of New York. That’s up from $1.242 trillion in Q1 2026, but still lower than Q4 2025’s $1.277 trillion, which marked the highest balance since the New York Fed began tracking the data in 1999. Furthermore, the average American carries $6,595 in credit card debt. Economists and investors will be watching closely to see if consumers can sustain a consumption engine that drives roughly two-thirds of U.S. gross domestic product or if Americans may begin to cut spending—a shift that would have greater implications for overall economic growth.