2026 Will Be Different for Consumers | December 2025 Market Update

Hello and welcome to this month’s market update for December 2025, the last market update for the calendar year. Happy holidays to everyone! Hope everyone is safe and well, spending time with family. This month, to end the year, we want to look at one of the things that we believe will be the hot topic for 2026. Really, it comes down to consumer behavior, which we’ve talked about quite a bit in the past, and how that consumer is influenced by prices.

Affordability as the Core Theme

Affordability has really been a hot topic to close out 2025, and we expect it to remain so in 2026. Certainly, with midterms coming around the corner in November 2026, it will be something that is talked about at length. It was a very big topic coming into the presidential election at the end of 2024, and with affordability becoming a primary concern, or really the concern, over the last number of years since the Covid pandemic.

It is still in focus this year, and we want to talk about where we’re at so far at this point in time.

Looking Back at Inflation

What we have in front of us here is a ten‑year look back for inflation information, and the top chart that you see in front of you shows a couple of different ways that we look at inflation.

The yellow line, or the orange line more specifically, is the Consumer Price Index, or CPI. That tends to be the number that a lot of people will look at. It’s what a lot of the news media outlets show whenever they’re talking about inflation. And yes, we are down quite significantly since the middle of 2022, when inflation peaked at over 9%. We are now down to close to 2% to 3%.

The Fed, Rates, and Policy Path

But what we’ve seen throughout the course of the year is that this number has increased gradually throughout that period of time. Now, the Federal Reserve, being focused on inflation as one of their mandates, the second mandate being full employment, is keenly aware of how inflation impacts consumers and their ability to spend. As a result, what we can see in the chart below is after they’ve increased the interest rate since the beginning of 2022 to combat inflation, they’ve really started to bring that down over the last couple of months, really the last year.

By the time you’re watching this video, it’s likely that they will have reduced the interest rate once again by 0.25%. So this upper limit that they’re targeting of 4% is going to be closer to 3.75% to start 2026.

Now, currently, the expectation is that they’re only going to cut a handful more times in 2026. Right now, the market is expecting two more cuts to help ease that burden of higher interest rates.

But that really only puts the overnight rate, or the target that the Federal Reserve works with, down towards 3.25%.

Spending on Goods vs. Services

Now, the reason why they’re not cutting more aggressively is because we’re seeing some of that affordability show up in the consumer data. The chart that shows in front of you right now is a chart that shows retail spending for retail‑focused individuals, but then also services.

So you can think of that as goods or services, which is how our gross domestic product is calculated. Retail is more of the tangible items that you can buy—buying furniture, buying a car, buying a home, things that are tangible goods—whereas services are more going out to eat, travel, staying at a hotel, lodging, and so on and so forth.

The solid lines here show a decent increase in retail and services spending throughout the course of 2025. We can see both retail and services spending have increased throughout the end of the year, but the dotted lines show the number of transactions that have occurred in both of those categories, and what we’re seeing, at least as far as retail spending is concerned, is the number of transactions has actually fallen throughout the course of the year.

One way to interpret that data is to say individuals are spending more on the goods and services that they’re procuring, but they’re doing it with fewer transactions, which means that the things they’re buying are costing them more. Especially when you’re looking at the goods side of the equation, we’ve seen those goods transaction numbers fall, while transactions for services have increased throughout the year.

That would suggest that inflation hasn’t hit those services as much as the goods side. Again, there are a number of ways that you can interpret this, but the point is that consumers are feeling somewhat of a pinch whenever they’re going to the supermarket or going out and purchasing goods for their home or other reasons. And when we’re looking at that in sentiment data, we’ve seen that over the last couple of months.

Consumer Sentiment Across Income Levels

Consumer sentiment, especially in the lower‑income cohorts, is negative. They have been feeling a strain throughout the year, while those in the higher‑income cohorts have not been feeling as badly about the overall economy, and therefore their sentiment has more or less stabilized throughout 2025.

Now, the good news is, when we’re looking at this information, you also want to look at how much money the consumer has in their pocket—what is in their bank—in order to sustain this spending.

Savings, Stimulus, and “Gas in the Tank”

Consumers in aggregate represent about 70% of our overall economic output. So if the consumer is unhealthy, that means that we’re not going to be seeing as much growth as an economy. One of the ways to look at that is how much money they have in their bank accounts. One of the interesting data points that we like to point to:

Bank of America tracks a number of data points for the consumers that work with them, specifically from a banking standpoint, and they’ve been able to track their savings data since prior to Covid and even well before that. Looking at it from a baseline of 2019, we can see how savings accounts have grown as a result of some of that Covid‑related stimulus.

We can also see how consumers have started to spend that down since that 2019 period. Once we hit Covid, we saw consumer bank accounts increase quite substantially. Part of that is from the stimulus payments that we saw, but we also saw significant wage growth throughout that period of time. Many consumers were able to switch jobs or increase their wages through their current job.

From that, in addition to some of the stimulus payments, we saw their bank accounts really elevate in total dollars saved. Since then, however, we’ve seen those bank accounts start to get depleted. That’s when inflation really started to eat at some of the money that was stored away. If you look at the blue line, the lower‑income cohorts benefited the most from the stimulus and the wage growth.

Since then, they’ve been the ones to see their bank accounts deplete the most since the beginning of 2021. Other wage cohorts—the $50,000 to $100,000 wage earners and the $100,000‑plus group—have also seen their bank accounts depleted. But the key takeaway here for us is that those bank accounts are still elevated, even on an inflation‑adjusted basis, since pre‑Covid.

So what does this mean? There is still likely some gas left in the tank for them to be able to work through affordability issues and other inflationary pressures that may be seen in the prices of the goods and services they’d like to purchase since the beginning of Covid.

Big Picture Heading into 2026

So overall, you put that into the big picture and you say, yes, the consumer is still on relatively stable footing.

Yes, sentiment has fallen a little bit over the last couple of years. And when we’re going into 2026 and we’re focused on the consumer, this is going to be a big part of it. Are they going to have to pay down or spend down some of their savings from their bank accounts? Or will inflationary pressures abate and they will be able to continue to spend without too much issue?

Again, this is going to be one of the big points of conversation that we’re likely to see throughout 2026, especially heading into the election year. Overall, we’re relatively optimistic about the consumer. We believe that inflationary pressures will remain muted for the most part, but we want to keep a keen eye on how consumers are working through some of these inflationary pressures and whether it becomes too big of an issue for them—if they start to pull back on their overall spending levels.

Closing Remarks

So with that, we wish you and your family a very happy holidays and a great start to 2026. Of course, if there are any questions or concerns throughout the course of the year or the months ahead, don’t hesitate to give us a call. We’re always happy to answer those questions for you. Take care.