The Federal Reserve’s preferred inflation gauge cooled as expected in January, with the Personal Consumption Expenditures price index rising 2.5% from a year ago. However, the positive news came with another potential warning sign for the US economy: consumers pulled back their spending by the most in nearly four years.
According to Commerce Department data, consumer spending fell 0.2% in January, adjusting for inflation it declined 0.5%. This is the biggest monthly decline since February 2021. Spending on goods, particularly autos and big-ticket items, dropped off the most.
Economists attribute the slowdown in consumer spending to various factors, including frigid weather, deadly wildfires, and a natural retreat from holiday splurges. However, some experts warn that this could be a sign of deeper economic concerns.
“We’re seeing consumers scrambling to process the winds of change coming out of Washington,” said Christopher Rupkey, chief economist at FwdBonds. “They’ve decided to sit it out and wait.”
Despite this, economists anticipate a rebound in spending in the coming months, citing solid labor markets and rebuilding efforts from devastating wildfires.
The inflation rate remained elevated, but within striking distance of the Fed’s 2% target. The core PCE price index rose 0.3% for the month, slowing from 2.9% in December. Inflation expectations are on the rise, with long-run inflation expectations surging to their highest level in nearly three decades.
The Fed is expected to hold rates steady when policymakers meet in March, but some experts predict a potential rate cut in the summer. Senator Elizabeth Warren has urged the Fed to take action, citing flashing warning signs of a “chaos economy.”
Source: https://edition.cnn.com/2025/02/28/economy/pce-inflation-consumer-spending-january/index.html