• Key insight: Reports on retail sales and consumer confidence paint a picture of an economy weakening under the pressure of high prices. 
• Expert quote: "The economy is highly dependent on consumer spending – close to 70% of GDP can be traced back to it – so it's a case of be careful what you wish for, because too big a slowdown, and especially too prolonged a slowdown, could end up hurting corporate profits and, in turn, the stock market." — Chris Zaccarelli, chief investment officer of Charlotte-based Northlight Asset Management
• Forward Look: The Fed still has another month's worth of data to collect before convening its next monetary policy meeting. Until then, markets are split on the best path forward.

High prices appear to be weighing on economic activity, complicating the outlook for the Federal Reserve's upcoming monetary policy meeting.The advanced reading on retail sales, as tracked by the Census Bureau, showed activity declined by 0.6% in July, despite a World Cup boost. Also, the University of Michigan's latest survey of consumers results showed sentiment has declined for both individuals and businesses. 

The two reports were released Friday morning, capping a week of key economic indicators that included a pair of elevated — but not excessive — inflation reports and surprisingly poor hiring data. While the readings are collectively ominous for the broader U.S. economy, they were welcomed by financial markets as a signal that the Fed might be less inclined to raise rates next month.

"The past week has had three positive reports in a row that are good for a market that was concerned about an imminent rate hike," said Chris Zaccarelli, chief investment officer of Charlotte-based Northlight Asset Management. "Of course, two of the three reports are in the 'Bad News is Good News' category, because a weak labor report last Friday and an even weaker retail sales report this morning are bad news for workers and consumers, but potentially good news for the stock market because it reduces the urgency at the Fed to raise rates to fight too-high inflation."

The retail sales report tracked $763.6 billion of activity last month, a 0.6% decline from June but a 5% increase from July 2025. Factoring out spending on autos and gas, activity was down 0.2% on the month. 

In an analyst note, Fifth Third's chief U.S. economist Bill Adams said the decline in gas station spending largely reflects lower gas prices in July, which is a positive development. But, the 0.5% decline in electronics and appliance sales as well as the 2.2% drop in e-commerce sales — partly reflecting a change in dates for Amazon's Prime Day promotion — were disappointing. 

"One bright spot in the report was the 0.5% increase in food service and drinking place sales," Adams wrote. "This category likely got a boost from the World Cup, but could soften in August."

The University of Michigan survey tracked a 7.6% month-to-month decline in consumer sentiment, which translated into a 12.4% decline year over year. While personal financial expectations ticked down slightly in the survey's index, the bulk of the decline in sentiment came from dour expectations for business conditions, which were down 11% in the near term and 17% over the long run. 

Overall, year-ahead inflation expectations ticked up from 4.2% in June to 4.3% in July, with just 8% of respondents saying they expect incomes to outpace inflation in the year ahead. While some policymakers discount the findings of the Michigan survey, preferring market-based indicators of inflation such as investment in inflation-protected securities and swaps, the series is long-running and often cited by economic observers as indication of general expectations.

The Bureau of Labor Statistics released two inflation reports this week that showed price growth remains above the Fed's target, but is not moving up rapidly. The often-referenced consumer price index showed a headline growth rate of 3.4% in July — the same reading as June — and a core rate of 2.5%. The BLS's produce price index, which tracks wholesale prices, ticked up 0.2% in July and fell significantly on an annualized basis, from 5.5% in June to 4.7% in July.

"The soft PPI reading for July points to reduced inflationary pressure for businesses in coming months," wrote Nationwide senior economist Ben Ayers in an analyst note. "While the renewed rise in fuel costs is concerning, input costs beyond energy are cooling which should enable most firms to absorb a temporary increase in fuel-related expenses."

Together, the two reports show that inflation remains high but is not running away like it did in 2021 and 2022, when the Fed was forced to increase its benchmark rate rapidly to tamp down on prices. This leaves open the possibility that prices have shot up recently because of one-off reasons — namely the war in the Middle East — and could decline on their own without monetary policy intervention.

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At the same time, policymakers have noted that inflation has been above 2% for more than five years now and they would like to see it start moving toward its target. 

Coming into last week, two-third of market participants expected the Federal Open Market Committee to raise interest rates next month, according to federal funds rate futures contracts tracked by CME Group. As of Friday morning, those positions had flipped, with just under 70% pricing in no change to the rate and 30% forecasting a hike.

Policy uncertainty was high coming out of the last FOMC meeting in late July, as Fed Chair Kevin Warsh refused to spell out the committee's outlook or reaction function. The consensus was that, with inflation above the Fed's 2% target and stable labor market, a rate hike would likely be needed sooner than later to tamp down on price growth. 

For now, the tepid economic indicators could be a boon for interest rates and financial markets more broadly. But if they continue on for too long, they could prove damaging. 

"The economy is highly dependent on consumer spending – close to 70% of GDP can be traced back to it – so it's a case of be careful what you wish for, because too big a slowdown, and especially too prolonged a slowdown, could end up hurting corporate profits and, in turn, the stock market," Zaccarelli said. "But in an environment where inflation can cool down and the Fed can keep rates on hold as a result of that, would be very good for this bull market."