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WASHINGTON—American consumers significantly reduced their spending in January, marking the most significant decline since February 2021, even as inflation continued to ease. The latest data from the Commerce Department, released on Friday, highlights growing caution among Americans amid rising economic uncertainty. Meanwhile, looming tariffs and policy changes threaten to disrupt progress on inflation and economic stability.
- Consumer spending declines: Americans cut their spending by 0.2% in January compared to the previous month, the sharpest drop in nearly four years. The decline was likely influenced by unseasonably cold weather, but it also signals growing consumer caution as economic uncertainty looms.
- Inflation eases: Inflation declined to 2.5% in January compared to a year earlier, down from 2.6% in December. Core prices, which exclude volatile food and energy categories, dropped to 2.6%, the lowest level since June 2024. This decline could reassure Federal Reserve officials that inflation is gradually cooling.
- Income growth: Despite the spending pullback, personal incomes jumped by 0.9% in January, partly fueled by a large annual cost-of-living adjustment for Social Security beneficiaries. Disposable personal income (DPI) also rose by 0.9%, giving Americans more financial flexibility.
The report revealed significant shifts in consumer behavior:
- Goods spending plummets: Spending on goods fell sharply, led by a $41.1 billion drop in motor vehicles and parts. Other categories, such as recreational goods, furnishings, and clothing, also saw declines, reflecting reduced demand for physical goods.
- Services spending rises: In contrast, spending on services increased, with notable gains in housing and utilities (29 billion) and food services and accommodations (13 billion).
Inflation and tariff concerns
While inflation has cooled significantly from its peak of 7.2% in 2022, concerns remain about the potential impact of new tariffs proposed by the White House. President Donald Trump recently announced plans to double tariffs on Chinese imports to 20% and impose 25% import taxes on Canada and Mexico, the United States’ top trading partners. These measures could push prices higher and disrupt the progress made on inflation.
A report by the Federal Reserve’s Boston branch warned that 25% tariffs on Canada and Mexico, combined with existing tariffs on China, could lift core inflation by as much as 0.8 percentage points. While tariffs in 2018-2019 had a limited impact on inflation, they did slow economic growth, prompting the Fed to cut interest rates.
The next release of personal income and outlays data covering February 2025 is scheduled for March 28, 2025.
