Inflation in the US eased in January, but the Fed signals patience before considering interest rate cuts
The latest US economic data indicates that inflation eased slightly in January, but consumer spending fell unexpectedly, raising concerns about economic momentum.
According to the US Commerce Department, the personal consumption expenditures (PCE) price index, the US Federal Reserve’s preferred inflation measure, increased by 0.3 percent for the month, bringing the annual rate to 2.5 percent.
Core PCE, which excludes food and energy, also rose by 0.3 percent in January and was up 2.6 percent year-over-year, marking a decline from December’s revised 2.9 percent.
Despite cooling inflation, US consumer spending dropped by 0.2 percent in January, the largest monthly decline since February 2021, as reported by CNN.
When adjusted for inflation, spending contracted by 0.5 percent. The drop in consumption was driven by lower spending on goods, particularly automobiles and other high-cost items, though essential purchases such as housing and gasoline remained stable.
The personal savings rate jumped from 3.5 percent in December to 4.6 percent in January, indicating that Americans were holding onto their income rather than spending.
Bloomberg reported that sentiment among US consumers and businesses has soured, with confidence measures falling sharply in February. The University of Michigan’s consumer survey found that long-term inflation expectations had reached their highest level in nearly three decades.
Businesses have also warned about rising costs, particularly due to tariff policies under US President Donald Trump’s administration.
“There’s a slight smell in the air of stagflation,” EY’s Chief Economist Gregory Daco told Bloomberg, referring to the combination of stagnant economic growth and persistent inflation pressures.
However, he noted, “We’re not there yet.”
Tariffs have been a central concern for markets and businesses, with Trump proposing new levies on key trading partners, including a 25 percent tariff on goods from Mexico and Canada and an additional 10 percent duty on Chinese imports.
Ford CEO Jim Farley told Bloomberg that these tariffs could “blow a hole” in the US auto industry, while companies like Chipotle have raised concerns over price hikes on essential goods such as avocados and limes.
According to Reuters, the US Federal Reserve is closely monitoring inflation trends and economic activity as it considers future interest rate decisions. The American central bank has paused rate cuts for now, maintaining its benchmark rate between 4.25 percent and 4.50 percent.
Market expectations for rate reductions remain uncertain, but futures traders have slightly increased the likelihood of a cut in June, with CME Group’s FedWatch gauge now placing the probability above 70 percent.
The economic slowdown is evident in various indicators. Reuters reported that business investment remains sluggish, jobless claims are climbing, and GDP growth forecasts for the first quarter are pointing to weaker expansion.
The Atlanta Fed’s GDPNow model suggests the economy may contract in the first quarter, though these estimates are subject to revisions. The deteriorating outlook has led some policymakers to push for rate cuts.
US Senator Elizabeth Warren urged the Federal Reserve to act, saying, “With flashing warning signs — dissipating labour 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.”
Concerns over inflation expectations remain a critical issue for the central bank. Bloomberg noted that inflation expectations are rising among both consumers and businesses, which could challenge the Fed’s ability to maintain stable prices without triggering a recession.
Chicago Fed President Austan Goolsbee acknowledged the recent increase in inflation expectations but suggested that it would require several months of similar data before the central bank alters its approach.
Kansas City Fed President Jeff Schmid took a more cautious stance, warning that the sharp increase in expectations has made him more wary about inflation risks than he was a month ago.
The US Federal Reserve is now facing a difficult policy decision. If inflation expectations remain high and economic growth slows, the central bank will have to weigh the trade-off between keeping rates high to control inflation or cutting them to support economic activity.
“They may have been slow on the uptake in raising rates this last time, but stagflation is a whole other ball game for the Fed,” KPMG Chief Economist Diane Swonk told Bloomberg. “They cannot allow something like that to take hold.”
While recent inflation data suggests the US economy is moving closer to the Fed’s 2 percent target, broader economic uncertainties remain. The combination of weaker consumer spending, tariff-related price pressures, and softening business investment has created a complex economic environment.
