Consumers have been the fuel powering the U.S. economy recently. Can they keep it up?

In May, inflation rose to its highest level since April 2023, largely due to higher gas and grocery prices amid the war in Iran. While gas prices have fallen in recent weeks, they’re still far above levels at the onset of the war. Consumer sentiment about the economy and their finances has grown more pessimistic; however, spending has remained strong.

Historically, low consumer sentiment has led to lower consumer spending. Since the COVID-19 pandemic, that correlation has weakened.

Why This Matters

Consumer spending has been the driver for U.S. economic growth. If it slows, it could trigger a recession, leading to a sluggish stock market and higher unemployment.

While many Americans are not halting their spending, they are seeking deals and ways to spend less, such as filling up at wholesale clubs, using public transportation or adjusting their summer plans.

Investopedia spoke with John Mercer, head of global research at Coresight Research, about how consumers have managed to maintain their spending. This interview has been edited for brevity and clarity.

INVESTOPEDIA: How could high oil prices impact consumers besides at the gas pump?

JOHN MERCER: The big risk is that if oil prices stay elevated because of ongoing disruption, we will see tertiary effects from higher oil prices. We’ve already seen a primary and secondary effect.

The primary effects are the immediate flow to gasoline prices. That’s very quick; it takes roughly a week. The secondary effects are where those higher oil and gasoline prices then cascade through the supply chain, and that impacts the prices of goods and services.

If you have persistent inflation, then the tertiary effects are in things like wages. As inflation proves persistent and sticky, wage demands get more aggressive, wages rise faster, and then you get this cycle of inflation, which is what we saw a few years ago. That’s the real risk.

INVESTOPEDIA: How are high gas prices impacting consumers’ spending habits?

MERCER: Consumers are highly attuned to inflation. They’ve had it on their mind all through 2025. They told us it’s their top concern about tariffs. Then, of course, tariffs may not have been superseded, but in the near term, have been overtaken by oil prices amid global conflict.

About two-thirds now say they’re cutting back spending because of higher gasoline prices. One of the things we do find from that is that services seem to be more exposed…The top three options for cutting back were restaurants, bars and travel.

It does suggest that discretionary services are more exposed than retail categories.

INVESTOPEDIA: Why are consumers more inclined to cut back on services over discretionary retail spending?

MERCER: It’s easier to cut back [on services], because there will be a higher ticket price. You could make one cut and probably save more than you would by making one cut in a retail purchase.

The current context isn’t all bad; consumers are continuing to spend at retail, and a big factor there is tax refunds. Tax refunds are up by about $50 billion compared to how they were last year. So, there’s about $50 billion more swimming around in the consumer economy that can absorb a lot of those gasoline price rises, and as a result, we’re seeing retail sales grow really quite strongly.

INVESTOPEDIA: How can we expect consumers to act during the last half of 2026?

MERCER: This is supposition, but what we’re pointing to for the summer season and back-to-school shopping—which is a really big season for retail—is the recent performance of retail and the recent earnings season. The tax refunds all point to near-term resilience in retail, and we think that will support spending into the summer travel season and into the back-to-school season.

The risk is that if this gasoline inflation and overall inflation prove sticky and endure through the year, and consumers effectively erode those tax refunds, then later in the year, they’re more exposed to that higher inflation.

The inflationary effects of the Middle East conflict are likely to amplify the so-called “K-shaped” economy, where higher-income consumers continue spending, and lower-income consumers tend to be more cautious or cut back.