The Federal Reserve’s preferred inflation gauge showed signs of cooling in January, but the data also revealed a worrying trend: consumer spending dropped at the sharpest rate in nearly four years.
The Personal Consumption Expenditures (PCE) price index, released by the Commerce Department on Friday, rose 2.5% from a year earlier, down slightly from December’s 2.6% annual rate. This slowdown aligns with expectations, offering some relief in the fight against inflation.
While a spending slowdown was anticipated after the holiday season, the drop was steeper than forecasted. Consumer spending fell 0.2% from December to January, but when adjusted for inflation, the decline was even greater at 0.5%—the biggest monthly drop since February 2021.
Higher prices for food and energy, especially eggs, contributed to inflation pressures last month. Analysts had predicted that PCE inflation would increase 0.3% month-over-month while the annual rate would ease to 2.5%, in line with FactSet estimates.
The combination of slowing inflation and weaker consumer spending raises questions about economic momentum. Consumer spending is a key driver of the US economy, and a sustained pullback could signal cooling growth in the months ahead.