Consumer Spending Shifts: Credit Fills Inflation Gaps

Recent analyses released on Friday, December 5th, have painted a detailed picture of a dynamic yet increasingly strained consumer economy. Data from both the Bureau of Economic Analysis (BEA) and the University of Michigan reveal a landscape where income accrual is decelerating, the expansion of consumer spending is moderating, and overall sentiment persists at uncharacteristically subdued levels for this period of the year. This confluence of factors presents a compelling narrative for financial technology (fintech) innovators and stakeholders, as consumers adapt their financial behaviors in response to these evolving economic pressures.

Navigating Economic Headwinds: A Closer Look at Consumer Behavior

The latest economic indicators point towards a significant recalibration in consumer financial strategies. The interplay between inflationary pressures and wage stagnation is compelling households to explore alternative mechanisms for sustaining their purchasing power, with profound implications for the digital finance ecosystem.

Slowdown in Income and Consumption Growth

The delayed release of personal consumption expenditures (PCE) data from the BEA offered critical insights into these shifts. Inflation maintained a steady month-over-month rate of 0.3% in September, translating to a 2.8% year-over-year increase. More tellingly, real disposable personal incomes, adjusted for inflation, grew by a mere 1.9% year-over-year in September. This growth rate marks a continued deceleration from 2.8% in September 2024 and a more robust 5.2% in September 2023, illustrating a clear downtrend in consumers' inflation-adjusted earnings. Concurrently, real personal consumption expenditures recorded a 2.1% growth in September, a noticeable step down after four consecutive months above 2.5% and falling short of the 3.4% pace observed a year prior.

A striking pattern emerges from these figures: consumption has consistently outpaced income growth for an unprecedented 17 consecutive months. This enduring disparity underscores not only the resilience of household spending but also highlights a fundamental structural gap in how consumers are financing their daily transactions. The sustained demand, despite lagging income growth, signals an increasing reliance on external financial buffers, often facilitated by accessible fintech solutions.

The Ascent of Digital Borrowing and Installment Plans

To bridge this widening financial gap, a significant number of households are increasingly turning to various forms of credit. In an environment where income growth is subdued and the cost of living remains elevated, consumers are proactively engaging with digital borrowing products, flexible installment plans, and an array of liquidity tools designed to manage timing discrepancies between income and expenditure. This trend is particularly pronounced among individuals living paycheck-to-paycheck, for whom such financial instruments offer crucial flexibility.

A recent PYMNTS Intelligence report, titled “Black Friday on a Budget: How Discipline and Deals Shaped Holiday Shopping in 2025,” corroborates this observation. The study found a notable surge in the use of credit card installment plans among struggling paycheck-to-paycheck shoppers, rising from 49% to 58% across various retail channels during the Black Friday sales period. This uptick in installment utilization underscores a strategic shift in consumer purchasing behavior, driven by the necessity to compartmentalize and manage spending more effectively. The PCE data further indicated a discernible pullback in discretionary categories, such as clothing, footwear, and recreational goods, while spending on essential food and beverages remained largely stable. This prioritization of essential goods suggests that discretionary purchases are increasingly being deferred or financed through credit, even as the holiday shopping season endeavors to stimulate broader consumer engagement.

Consumer Sentiment: Cautious Optimism Amidst Lingering Concerns

Beyond raw spending data, consumer sentiment offers a qualitative dimension to the economic narrative, reflecting the collective mood and future expectations of the populace. While recent figures show a marginal improvement, underlying anxieties persist.

A Glimmer of Hope in Sentiment Data

Preliminary December data from the University of Michigan’s consumer sentiment index registered a 4.5% improvement over November. This modest increase was largely propelled by a 7.8% rise in the expectations subindex, while the current conditions subindex remained relatively flat, declining by a mere 0.8%. This divergence suggests that while consumers may not perceive a significant improvement in their immediate financial circumstances, they harbor a slightly more optimistic outlook regarding future economic prospects. This forward-looking sentiment, though nascent, is a positive signal for future economic activity.

However, it is crucial to contextualize this improvement within the broader trend. Despite the month-over-month uptick, overall consumer sentiment currently sits 28% below its level from the same month a year ago. Historically, no other December in the 48-year existence of this series has recorded such a significant year-over-year decline. Furthermore, sentiment related to personal finances continues to lag, remaining nearly 12% below levels observed at the start of 2025. Labor market expectations, while showing a minor improvement, generally remain weak. Notably, young consumers were identified as a primary driver of the improved expectations, suggesting a demographic split in optimism, with younger cohorts perhaps more attuned to or reliant on emerging financial tools and opportunities.

Persistent Inflationary Pressures and Expectations

Amidst these varied sentiment indicators, one particularly constructive development arises from the University of Michigan data: short-term inflation expectations have consistently fallen for the fourth consecutive month, reaching 4.1% in December, down from 4.5% in November. The five-year inflation outlook, by contrast, remained stable at 3.2%. This decline in near-term inflation expectations could alleviate some pressure on household budgets and potentially encourage more stable spending patterns in the coming months, offering a crucial data point for economic planners and fintech innovators designing inflation-mitigating products.

In summation, the concurrent release of these two pivotal economic reports presents a cohesive and multifaceted narrative of the contemporary consumer. Income growth is experiencing a clear loss of momentum, yet spending patterns remain robust, compelling consumers to navigate increasingly wider financial discrepancies in real time. While sentiment exhibits minor improvements, it remains considerably weaker than the previous year, underscoring a prevailing cautiousness among households even as their purchasing activities persist. Consequently, the "paycheck-to-paycheck consumer" is emerging as a dominant force, dictating the trajectories of spending, the utilization of credit, and the overall demand for liquidity solutions as the economy transitions into 2026. This dynamic landscape provides fertile ground for fintech innovations aimed at empowering consumers with greater financial agility and resilience.