Down on the Corner: For all of the optimism around consumption entering 2026, it’s been a disappointing first half of the year for consumers. The energy shock obviously played a large role in compressing real wages and spending, but those expecting a material rebound as energy prices have cooled are likely to be disappointed once again. Consumption perked up in the second quarter, but headwinds are once again mounting which will likely keep consumption on a moderating path.
July 2026 charts and highlights
Bad Moon Rising: Energy prices may be front and center, but all of the hawks’ attention is squarely on the firming in supercore services prices. These prices tend to be a function of labor market conditions, and as such the divergence between rising supercore services prices and softening wages is notable. With labor market conditions remaining soft and leverage firmly in employers’ hands, it’s hard to see how wage growth accelerates materially from here, suggesting the divergence may prove to be short lived, with supercore services settling back down in the months to come.
Pawn Shop: For all the focus on the saving rate, the better tell with respect to the consumption outlook remains the continued cooling in income growth. Year-over-year nominal income growth now sits below both the fed funds rate and headline PCE inflation, suggesting consumers, particularly the lower income cohort, are facing a dual squeeze of tightening financial conditions and compressing real incomes. Upper income earners continue to support a high floor for consumption, but the dual squeeze on lower income consumers is likely to weigh on the marginal rate of growth in consumption.
Wrong Way: AI is proving to be a powerful force affecting all parts of the economy and markets. While the positive growth effects of AI on both the economy and corporate earnings have been much discussed, it is beginning to have a material effect on inflation prints as well with the infrastructure buildout pressuring the prices of computer software and accessories higher by nearly 60% annualized over the past six months. Not only is that pressuring PCE inflation higher, but it’s also becoming a material force driving a wedge between softer CPI prints and deteriorating PCE data and overstating the degree of inflation stickiness in the Fed’s preferred inflation gauge.
Who’ll Stop the Rain: While technicals continue to be the driving force behind the unwind of the crowded momentum trade, the price action is being backfilled by renewed concerns around the durability of the AI trade. Semiconductors have been at the leading edge of the momentum trade, and while they have seen massive upside earnings revisions, they have historically been a highly cyclical industry. The question is whether that remains the case. We may be at peak earnings, in growth rate terms, but if that’s followed by a moderation to still lofty levels of earnings growth we may see renewed strength once positioning is cleaned up.
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Archived analysis
Don’t Push: Markets resist the narrative
Read how revisions, demographic shifts, and income trends are reshaping inflation, consumption, and markets.
The long run: AI leads, incomes cool, risks linger
AI-led markets mask a cooling economy as incomes soften and the Fed shifts toward hawkish policy risks.
Fly Like an Eagle: Markets rise as risks linger
Markets rally amid resilience but face risks from energy disruptions, soft labor demand, slowing wages, and weak consumption.
The team
Jack Janasiewicz, CFA
Multi-Asset Portfolio Manager and Lead Portfolio Strategist
Natixis Investment Managers Solutions
Garrett Melson, CFA
Portfolio Strategist
Natixis Investment Managers Solutions
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Glossary
A hawk (or monetary hawk) is a central bank policymaker or economic analyst who prioritizes controlling inflation over maximizing economic growth. They typically advocate for restrictive monetary policies, such as raising interest rates and reducing the money supply, to keep prices stable.
Truflation is designed to fix the structural lags and estimation techniques found in traditional government indicators like the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index.
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