Falling consumer sentiment accompanies weaker retail sales

U.S. consumer sentiment lost momentum in August, reversing two months of improvement, as households remained uneasy about inflation and the broader economic outlook.

The preliminary August 2026 University of Michigan Consumer Sentiment Index declined to 51.0, well below the 54.5 reading economists surveyed by Reuters had expected. This decrease represented a 7.6% fall from the prior month and was 12.4% lower than the prior year.

Perceptions of current economic conditions and expectations for the future declined by similar amounts. Inflation remained a central concern: Year-ahead inflation expectations edged up to 4.3% from 4.2%, while five-year expectations held at 3.3% for a third consecutive month. The University of Michigan report noted, “The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings.”

TABLE 1: UNIVERSITY OF MICHIGAN PRELIMINARY SENTIMENT RESULTS FOR AUGUST 2026

University of Michigan preliminary August 2026 consumer sentiment results: overall sentiment fell 7.6% from July, current conditions fell 5.5%, and expectations fell 8.7%.

Source: University of Michigan

Surveys of Consumers Director Joanne Hsu cited the broad demographic decline in sentiment:

“Consumer sentiment fell about 8% this August, ending two consecutive months of improvement. While views of personal finances saw only minor declines, expected business conditions sank 11% for the short run and 17% for the long run. Decreases in sentiment were seen across the political spectrum, with Republicans exhibiting the strongest month-to-month decline in August. Sentiment among Republicans is now 19% below readings just prior to the Iran conflict and the lowest since the 2024 election. Although the early-month weakening in sentiment was pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree. These groups are all particularly vulnerable to any erosion of purchasing power stemming from inflation.”

FIGURE 1: UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT BY POLITICAL PARTY

University of Michigan consumer sentiment from 2012 through August 2026, showing trends among Republicans, Democrats, independents, and consumers overall.

Sources: University of Michigan, Bespoke Investment Group

Ms. Hsu also highlighted the low percentage of consumers who expect their personal finances to improve soon:

“Across all consumers, only 8% expect their income growth to exceed inflation in the year ahead, down from 18% in December 2024, a reflection of the belief that high prices will continue to be burdensome.”

FIGURE 2: ONLY 8% OF CONSUMERS EXPECT INCOME GROWTH TO OUTPACE INFLATION OVER THE NEXT YEAR

Share of consumers expecting income growth to outpace inflation fell from 18% in December 2024 to 8% in August 2026.

Source: University of Michigan

Related Article: Is the U.S. economic glass more than half full?

Retail sales fall short of expectations

U.S. retail sales fell 0.6% in July 2026 to $763.6 billion, marking the largest monthly drop since May 2025, according to the Census Bureau data released by the Commerce Department. The decline missed economists’ expectations for an increase of 0.2% for July.

On the brighter side, “total sales for the May 2026 through July 2026 period were up 6.3 percent from the same period a year ago.”

U.S. News & World Report surmised that a post-tax-refund slump, along with spending anomalies related to the World Cup and Amazon Prime Day, could have affected the July numbers.

The article also placed the sales decline alongside other recent signs of moderation:

“The drop in spending for July, however, raised concern among some economists about the resiliency of consumers who have powered the economy forward despite nagging inflation and soaring gasoline prices. Yet, it may be too early to declare a retreat by one of the strongest and most consistent forces in the U.S. economy of late.

“Still, the weak sales report follows unexpectedly sluggish jobs figures last week, and both suggest the economy could be slowing after strong consumer and business spending in the first half of the year. …

“While most economists still expect solid economic growth in the July-September quarter, many have lowered their forecasts in the wake of the retail sales report.”

FIGURE 3: MONTHLY CHANGE IN U.S. RETAIL SALES (APRIL 2025–JULY 2026)

Monthly change in U.S. retail sales from April 2025 through July 2026, with sales declining 0.6% in July.

Sources: Data from the Census Bureau; chart from Neil Irwin/Axios

Axios noted what the recent weakening in economic data could mean for Federal Reserve policy:

“Combined with a weak jobs report last week and two subdued inflation readings this week, it points to the Federal Reserve having room to be patient on potential interest rate increases this fall.”