December 2025 PCE Report: Americans Are Still Spending — But Inflation Is Creeping Back Up
Source: U.S. Bureau of Economic Analysis | Released: February 20, 2026 | Reference Period: December 2025 | Assistance from Claude AI.
1. Headline Numbers
PCE Inflation: 2.9% year-over-year (up from 2.8% in November) The Federal Reserve’s preferred inflation gauge — the Personal Consumption Expenditures price index — rose 2.9% compared to December 2024. That’s the highest reading since earlier in 2025 and moving in the wrong direction relative to the Fed’s 2% target. Month over month, prices rose 0.4%, double the 0.2% pace seen in October and November. This came in warmer than most analysts had hoped. Verdict: Missed expectations (higher than desired).
Core PCE (ex-food and energy): 3.0% year-over-year Stripping out the volatile food and energy categories — which the Fed watches most closely as a signal of underlying inflation — prices rose 3.0% from a year ago, up from 2.8% in November. The monthly reading was also 0.4%. This is a meaningful acceleration and the first time core PCE has touched 3.0% in several months. Verdict: Missed expectations.
Consumer Spending (PCE): +0.4% in December (nominal), +0.1% real Americans spent $91 billion more in December than November in dollar terms. After adjusting for inflation, however, spending grew just 0.1% — a slowdown from November’s 0.2% real gain. People are spending more dollars but getting slightly less for them. Verdict: Met expectations on nominal basis; soft in real terms.
Personal Income: +0.3% in December Personal income grew $86.2 billion, a slight deceleration from November’s 0.4% gain. Importantly, after accounting for inflation, real disposable income — what people actually have to spend after taxes and price increases — was essentially flat (0.0% growth). Verdict: Neutral.
Savings Rate: 3.6% — a multi-month low The personal saving rate fell to 3.6% from 3.7% in November and 4.9% back in May. Americans are drawing down their financial cushion to sustain spending levels. Verdict: A quiet warning sign.
2. What This Actually Means
Think of this report as a snapshot of the financial health of American households in December. Here’s the plain-English version:
People kept spending through the holiday season, but rising prices are eating into what those dollars actually buy. When we look at spending after accounting for inflation, growth was barely positive — just 0.1%. In other words, Americans are opening their wallets wider, but they’re getting about the same amount of stuff.
At the same time, wages grew, but not fast enough to outpace rising prices. Real disposable income — the money households have left after taxes and inflation — went essentially nowhere in December.
To keep spending at this pace, people are saving less. The savings rate has fallen steadily from nearly 5% in the spring to 3.6% now. That’s not a crisis, but it means households have less of a buffer for unexpected expenses. If this trend continues, it could eventually constrain consumer spending — and since consumer spending drives about 70% of the U.S. economy, that matters.
The inflation picture is the most important part of this report. The Fed’s target is 2%. Core inflation came in at 3.0% year-over-year. That gap is the reason interest rates remain elevated and the reason rate cuts are not imminent.
3. Key Internals and Nuance
Services inflation is the stubborn core. Prices for services — think rent, healthcare, insurance, recreation — rose 3.4% year-over-year and have been stuck at that level for months. This is the most persistent inflation problem. Goods prices, by contrast, are nearly flat on an annual basis (+1.7%) and were actually negative in real spending terms in December, meaning people bought fewer goods.
Spending on goods fell in real terms. Motor vehicles and parts led the decline in nominal goods spending (-$6.3 billion), followed by clothing and footwear (-$2.4 billion). Services picked up the slack, with housing and utilities (+$29.4 billion), recreation (+$20.9 billion), and healthcare (+$20.5 billion) leading gains.
A wildfire settlement inflated income numbers. A notable one-time factor: a domestic electric utility paid settlements to Hawaiian households related to the 2023 Maui wildfires, adding roughly $23 billion to “other current transfer receipts.” This artificially boosted the income headline. Strip that out and underlying income growth was softer than the 0.3% top-line figure suggests.
Medicare is a rising driver of government benefits. Medicare spending increased $10.5 billion in December alone — part of a steady monthly climb all year. This reflects both population aging and rising healthcare utilization. It’s a structural trend, not a one-month anomaly.
Prior months were revised. October and November estimates were updated using refreshed Bureau of Labor Statistics employment data. This is routine but worth noting — the baseline picture for late 2025 may look slightly different than previously reported.
4. Trend Context
The savings rate tells the clearest story about where we are. From May through December, it fell from 4.9% to 3.6% — a persistent, uninterrupted decline. Americans have been funding spending partly by saving less, not because incomes have surged.
On inflation, the year-over-year PCE trend had been gradually moderating through mid-2025 (hovering around 2.5–2.7% from May through September). Since then it has crept back up: 2.7% in October, 2.8% in November, 2.9% in December. Core PCE followed the same pattern, ticking up to 3.0% from a relatively stable plateau around 2.8%. This is not a dramatic re-acceleration, but it is a reversal of the disinflationary trend the Fed had been counting on.
Real consumer spending growth has also decelerated. After robust gains of 0.5% and 0.3% in real terms in July and August, monthly real PCE growth has been: 0.1% (September), 0.3% (October), 0.2% (November), 0.1% (December). The economy is still growing, but the pace is cooling.
5. What Economists and Analysts Are Saying
The broad consensus among economists is that this report is mildly uncomfortable for the Federal Reserve — not alarming, but unhelpful. The combination of an inflation uptick and slowing real spending growth is sometimes called “stagflationary,” though most analysts resist that label given that the labor market remains reasonably solid.
Hawks on the Fed will point to core PCE at 3.0% as evidence that it’s too soon to cut rates — and possibly too soon to even signal cuts. Doves will note that real spending growth is decelerating and that the savings drawdown suggests consumers may be under more pressure than the nominal numbers show, arguing against further tightening.
Some analysts will flag the Maui wildfire settlement as a distortion that flatters the income numbers. Others will note that the month-over-month price acceleration (0.4%) was partially influenced by seasonal factors and energy prices, and may not persist.
There is real disagreement about whether this uptick in inflation represents noise or a renewed trend. Given that this report was delayed from its original January 29 release date (due to the October–November government shutdown), markets had less fresh context than usual — increasing the surprise factor somewhat.
6. Policy Implications
Federal Reserve: This report makes a near-term rate cut significantly less likely. The Fed has been explicit that it needs sustained progress toward 2% inflation before easing. Core PCE at 3.0% — moving in the wrong direction — gives policymakers little room. The mechanism is straightforward: higher-for-longer rates keep borrowing costs elevated for mortgages, auto loans, and business investment. Markets will likely push back rate-cut expectations further into 2026 following this release.
Congressional budget debates: The rising trajectory of Medicare and Medicaid spending visible in this data feeds directly into debates over entitlement reform and federal budget deficits. Medicare alone added over $10 billion per month throughout 2025. For lawmakers debating spending cuts or revenue measures, this structural growth in mandatory spending is an ever-present backdrop.
Executive branch: A 2.9% inflation rate that is moving upward is politically inconvenient. Consumer prices remain well above pre-pandemic levels, and the savings rate decline suggests household balance sheets are under pressure — despite a strong jobs market. Any administration policy that could be seen as inflationary (tariffs, for instance) faces a more complicated economic backdrop when the PCE trend is moving in the wrong direction.
7. What to Watch Next
January 2026 PCE (March 13, 2026): The most important immediate follow-up. If the 0.4% monthly price increase in December repeats in January, the Fed will face a much more serious inflation re-acceleration story. If it subsides back toward 0.2%, December may be viewed as a blip.
February Jobs Report (Bureau of Labor Statistics, early March): The labor market is the other half of the Fed’s dual mandate. Strong job and wage growth alongside rising inflation would further delay rate cuts. A softening jobs picture would complicate the picture — slower growth but sticky prices.
Q4 2025 GDP Second Estimate (late February): The first GDP estimate for Q4 will be updated with revised data. Consumer spending is the largest GDP component; the soft real PCE growth seen in December is a mild headwind for the Q4 growth picture.
8. Bottom Line
Americans kept spending through the end of 2025, but they’re doing it by saving less — and inflation is not cooperating with the Federal Reserve’s hopes for a smooth glide back to 2%. With core inflation now at 3.0% and moving upward, the Fed is unlikely to cut interest rates anytime soon, meaning borrowing costs for homes, cars, and credit cards will stay elevated. The economy isn’t in crisis, but it’s in a more uncomfortable place than it looked a few months ago.
Data source: U.S. Bureau of Economic Analysis, Personal Income and Outlays, December 2025 (BEA 26–12), released February 20, 2026.