U.S. consumers cut back drastically on spending last month, the most since February 2021, even as inflation declined, though stiff tariffs threatened by the White House could disrupt that progress, according to the Associated Press.
Americans cut their spending by 0.2% in January from the previous month, the Commerce Department said Friday, possibly because of unseasonably cold weather; however, the retreat may be hinting at more caution by Americans amid rising economic uncertainty.
Inflation declined to 2.5% in January compared with a year earlier, down from 2.6% in December, the government said. Excluding the volatile food and energy categories, so-called “core” prices dropped to 2.6%, the lowest since June, from 2.8%.
Last month’s decline could reassure Fed officials that inflation is still slowly cooling. The Fed prefers Friday’s measure to the more widely-known consumer price index, which rose for the fifth straight month in January to 3%. Friday’s gauge calculates inflation slightly differently: For example, it puts less weight on the costs of housing and used cars.
On a monthly basis, prices rose 0.3% in January from the previous month, matching December’s 0.3% increase. Core prices rose 0.3%, up from 0.2% in December. If sustained, January’s increases would keep inflation running above the Fed’s target. The Fed pays more attention to core prices because they provide a better read of future inflation.
A big concern right now is whether tariffs will push up inflation, slow the economy, or — in a particularly toxic combination — both.
A report from the Federal Reserve’s Boston branch this month concluded that 25% tariffs on Canada and Mexico, along with Trump’s initial 10% import taxes on China, could lift core inflation by as much as 0.8 percentage points.
