US consumer spending has declined for the first time in nearly two years, according to data from the Commerce Department. The 0.2% drop in January was led by a decrease in spending on goods, which fell 1.2%. This decline is largely attributed to businesses front-loading imports ahead of tariffs, which has set up the economy for potential weak growth or even a contraction this quarter.
Despite the decline, consumer spending remains underpinned by strong labor market conditions and resilient income growth. Personal income rose 0.9% in January, while wages increased 0.4%. This has led to an increase in the saving rate, which reached a seven-month high of 4.6%.
Inflation also showed some stickiness, with the core PCE price index rising 0.3% last month and up 2.6% year-on-year. However, prices are still expected to slow down due to the drop-out of large inflation increases from last year’s calculation.
The news comes as the Federal Reserve prepares to reassess its monetary policy stance, with economists predicting a possible interest rate cut in June. The Fed tracks the PCE price measures for its 2% inflation target and paused rate cuts in January amid concerns about higher inflation.
Overall, this data highlights the potential risks facing the US economy, including tariffs and their impact on consumer confidence and spending patterns. As the Federal Reserve navigates these challenges, it will be crucial to strike a balance between supporting growth and managing inflation.
Source: https://www.reuters.com/markets/us/us-consumer-spending-falls-january-monthly-inflation-rises-2025-02-28