Small business owners face tightening economic conditions as inflation reaches its highest point in years, and consumer confidence continues to fall.
The Federal Reserve’s preferred inflation gauge hit a three-year high in April. The Bureau of Economic Analysis reported the PCE price index rose 3.8% from a year ago, up from 3.5% in March. Month-over-month, prices rose 0.4%. Groceries, gas and utilities all contributed to the increase.
Consumers are feeling the squeeze. Disposable personal income fell 0.1% in April. Real disposable income dropped 0.5%. The personal saving rate slipped to 2.6%. Americans are spending more but taking home less in inflation-adjusted terms.
Consumer confidence dips
Consumer confidence also slipped in May. The Conference Board’s Consumer Confidence Index fell 0.7 points to 93.1, down from a revised 93.8 in April. The Present Situation Index, which tracks current business and labor market conditions, dropped 3.2 points to 121.2. Two-thirds of respondents said they were cutting back spending due to rising prices.
“Consumer confidence edged downward in May as the inflationary impacts of the war in the Middle East intensified,” said Dana M. Peterson, Chief Economist at The Conference Board.
Plans for major purchases weakened further. Fewer consumers said they plan to make major purchases in the coming months.
Interest rates rising
Borrowing costs are up as well. The average 30-year fixed mortgage rate rose to 6.53% for the week ending May 28, according to Freddie Mac. That is up from 6.51% the prior week. A year ago, the rate stood at 6.89%.
The labor market held steady but showed little growth. Initial jobless claims rose to 215,000 for the week ending May 23, up 5,000 from the prior week, the Department of Labor reported. The four-week moving average rose to 209,000. Layoffs remain low, but hiring has not picked up.
Discretionary spending down
Business owners, especially those in retail or luxury sectors, could see a slowdown in customer activity. Customers have less to spend, are being more cautious about big purchases and actively cutting back.
The Conference Board found that consumer spending in 2026 has shifted toward lower-cost options and essential services. Discretionary categories like clothing, hobbies and toys are seeing cutbacks. Restaurants, streaming services and personal care remain priorities for most shoppers.
Business owners will want to monitor inflation and consumer spending trends heading into summer. The next Personal Income and Outlays report from the Bureau of Economic Analysis is scheduled for release on June 25.
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