Inflation is easing, but another alarm bell is ringing about the US economy
Markets
Fear & Greed Index
Latest Market News
The Federal Reserve’s preferred inflation gauge cooled as expected in January; however, the good news came with another potential red flag for the US economic engine: Consumers pulled back their spending by the most in nearly four years.
The Personal Consumption Expenditures price index rose 2.5% in January from the year before, slowing from December’s 2.6% annual rate, according to Commerce Department data released Friday.
Consumer spending was expected to drop off in January: There’s typically a post-holiday expenditure hangover to start the year; plus, last month’s retail sales data came in far below forecasts.
But consumers pulled back far more than economists expected: Spending fell 0.2% for the month. Adjusted for inflation, it sank 0.5%. Those are the biggest monthly declines since February 2021.
Spending on goods — particularly autos and other big-ticket items — dropped off the most, Friday’s data showed. Consumers continued to spend on the essentials, such as housing and gas, while also putting their discretionary dollars toward eating out and other leisure activities at hotels.
At first glance, January’s spending slump, the first negative monthly reading in nearly two years, appears to substantiate an increasingly unsettling picture of the economic outlook.
Not only do price pressures remain, but a slew of recent data indicates that the US economy is indeed softening: GDP growth is slowing, business investment has been sluggish, consumer sentiment has soured, jobless claims are picking up and inflation expectations are on the rise.
RELATED VIDEO
Consumer confidence dips amid concerns about tariffs, jobs
However, economists note that January’s slowdown in consumer spending also could reflect factors such as frigid weather, deadly wildfires, a natural retreat from goods splurges the months before, auto dealers cutting incentives after a blockbuster December and also just pure caution.
“Consumers are scrambling to process the winds of change coming out of Washington, and have apparently decided to sit it out and wait,” Christopher Rupkey, chief economist at FwdBonds, wrote in a note to investors on Friday.
To be sure, as incomes shot higher in January (rising 0.9%), consumers socked those dollars away instead of spending. The personal saving rate skyrocketed in January, jumping to 4.6% from 3.5%, Friday’s report showed.
“Spending was much lower than expected; however, it came after pretty strong readings in the prior months — partly tied to holiday spending as well as the rebuild from the hurricanes that happened in October and September,” Beth Ann Bovino, US Bank’s chief economist, told CNN in an interview.
To that end, Bovino and others anticipate there could be a rebound in spending in the coming months, considering the labor market remains solid and as the Los Angeles area rebuilds from devastating wildfires.
“Beyond the dramatic drop in spending that could be explained as temporary, the report had good news on inflation and excellent news on income,” Robert Frick, corporate economist at Navy Federal Credit Union, wrote in commentary Friday. “Spending tends to follow income, and while consumers are jittery as evidenced by recent weak consumer sentiment and consumer confidence measures, if people have money, they usually spend it.”
Excluding food and energy prices, which tend to be more volatile, the closely watched core PCE price index rose 0.3% for the month and 2.6% from a year before, slowing from 2.9% in December.
The cost of food (especially eggs) and energy pushed up the Consumer Price Index and Producer Price Index readings for January. That had economists expecting PCE would rise about 0.3% from December but that the annual rate would slow to 2.5% from the initially reported 2.6%, FactSet estimates show.
“The good news from this report is that inflation didn’t come in hotter than we, and looks like markets, expected,” Bovino said. “We don’t think that cooler reading is going to change the Fed’s path, given a lot of uncertainty over inflationary White House policies; but it does reduce the risk of fewer cuts.”
Friday’s reading puts inflation back within striking distance of the Fed’s 2% target and indicates that some disinflationary trends are still in play.
However, close only counts in horseshoes and hand grenades.
The Fed itself indicated that it could take until 2027 for the pace of price hikes to stabilize at that 2% level.
It’s widely expected that the Fed will hold rates steady when policymakers meet in March. Given the latest inflation read, Bovino anticipates that the next cut could come in the summertime.
Sen. Elizabeth Warren, a Democrat from Massachusetts, on Friday raised alarm about the potential negative ramifications if the Fed does not move to cut rates.
“With flashing warning signs — dissipating labor gains, declining investment, and falling consumer confidence — today’s inflation data shows that the Fed has a small window to act to cut interest rates,” she said, categorizing the Trump administration’s policies as creating a “chaos economy.”
“At its meeting next month, the Fed should modestly cut rates to provide a buffer to respond to future uncertainty,” she wrote.
Prices remain elevated, and the cumulative effects of high inflation and high interest rates continue to weigh heavily on Americans, especially those who have little wiggle room in their monthly budgets. As of December 2024, prices were 10% higher than their pre-pandemic trend, new data from the Federal Reserve Bank of St. Louis shows.
The pullback in spending comes at a time when American consumers are growing increasingly pessimistic on fears that inflation will pick up because of President Donald Trump’s talk of wide-ranging tariffs, according to various surveys.
Trump has floated reciprocal tariffs on America’s trading partners and 25% duties on Mexico and Canada as well as an additional 10% tariff on Chinese goods.
RELATED ARTICLE
Americans are getting fed up with the economy. Does that mean we’re heading into a recession?
The University of Michigan’s February consumer survey showed that long-run inflation expectations surged to their highest level in nearly three decades.
The concern with higher inflation expectations is that they can be self-fulfilling to some extent: If consumers anticipate that prices will remain high, they might pull the trigger on large purchases and demand higher wages, and businesses might raise prices in response.
Recent data has indicated shifts in purchases made by consumers and businesses — likely tied to uncertainty around tariffs.
Fed officials have expressed in recent speeches that it’s crucial for people to keep faith that inflation will eventually return to normal in the long run.
While uncertainty has swelled in part because of the shock-and-awe policy moves from the Trump administration, it remains to be seen how actions such as steep and broad tariffs, mass deportations, and the shrinking of the federal workforce could affect the broader economy.
Comerica’s Bill Adams noted that the consumer spending drop and the jump in the trade deficit could end up weighing on real GDP growth in the first quarter.
“The question is the extent to which they are one-offs,” he wrote in commentary. “Import growth will likely be strong in February as well, as companies race to get ahead of decisions on tariff increases. But like January’s drop in consumer spending, this is probably a temporary drag on GDP, since much of these imports will be companies pulling forward purchases that they otherwise would have made later in the year.”
CNN’s Bryan Mena and Elisabeth Buchwald contributed reporting.
Most stock quote data provided by BATS. US market indices are shown in real time, except for the S&P 500 which is refreshed every two minutes. All times are ET. Factset: FactSet Research Systems Inc. All rights reserved. Chicago Mercantile: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices Copyright S&P Dow Jones Indices LLC and/or its affiliates. Fair value provided by IndexArb.com. Market holidays and trading hours provided by Copp Clark Limited.
© 2025 Cable News Network. A Warner Bros. Discovery Company. All Rights Reserved.
CNN Sans ™ & © 2016 Cable News Network.
Consumers deciding to ‘sit it out and wait’
Inching closer to 2%
Soft signals about the economy
MORE FROM CNN
CNN BUSINESS VIDEOS
Fed’s favorite core inflation measure hits 2.6% in January, as expected
Inflation eased slightly in January as worries accelerated over President Donald Trump’s tariff plans, according to a Commerce Department report Friday.
The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, increased 0.3% for the month and showed a 2.5% annual rate.
Excluding food and energy, the core PCE also rose 0.3% for the month and was at 2.6% annually. Fed officials more closely follow the core measure as a better indicator of longer-term trends. The 12-month core measure showed a step down from the upwardly revised 2.9% level in December. Headline inflation eased by 0.1 percentage point.
The numbers all were in line with Dow Jones consensus estimates and likely keep Fed Chair Jerome Powell and his colleagues on hold for the time being regarding interest rates.
The inflation report was “good, but we’re not done,” said Jose Rasco, chief investment officer for the Americas at HSBC Global Private Banking and Wealth Management. “So that prudent patient Powell, as I call him, is going to remain in play, and I think he’s going to wait.”
Elsewhere in the report, income and spending numbers showed some surprises.
Personal income posted a much sharper increase than expected, up 0.9% on the month against expectations for a 0.4% increase. However, the higher incomes did not translate into spending, which decreased 0.2%, versus the forecast for a 0.1% gain.
The personal savings rate also spiked higher, rising to 4.6%.
Stock market futures pointed higher following the report while Treasury yields were mostly lower.
The report comes as Fed policymakers weigh their next move for interest rates. In recent weeks, officials mostly have expressed hopes that inflation will continue to gravitate lower. However, they have indicated they want more evidence that inflation is headed sustainably back to their 2% goal before they will lower interest rates further.
Goods prices rose 0.5% on the month, pushed by a 0.9% increase in motor vehicles and parts as well as a 2% jump in gasoline. Services increased just 0.2% and housing rose 0.3%.
Following the report, futures traders slightly raised the odds of a June quarter percentage point rate cut, with the market-implied probability now just above 70%, according to the CME Group’s FedWatch gauge. Markets expect two cuts by the end of the year, though the odds for a third reduction have risen in recent days.
Though the public more closely follows the consumer price index, released earlier in the month by the Bureau of Labor Statistics, the Fed prefers the PCE measure because it is broader based, adjusts for changes in consumer behavior and places considerably less emphasis on housing costs.
The CPI for January showed an all-items inflation rate of 3% and 3.3% at the core.
Got a confidential news tip? We want to hear from you.
Sign up for free newsletters and get more CNBC delivered to your inbox
Get this delivered to your inbox, and more info about our products and services.
© 2025 CNBC LLC. All Rights Reserved.
A Division of NBCUniversal
Data is a real-time snapshot *Data is delayed at least 15 minutes. Global Business and Financial News, Stock Quotes, and Market Data and Analysis.
Data also provided by
Don’t miss these insights from CNBC PRO
News Tips
CNBC Newsletters
Advertise With Us
Register for FREE to continue using Reuters.com
