Inflation continues to take a toll on consumers, with prices rising 0.3% in January—matching December’s increase, which was the highest in eight months. However, new data from the Bureau of Economic Analysis suggests that higher prices may finally be pushing consumers to cut back on spending.
Some Good News: While inflation remains a persistent concern, the annual inflation index slowed to 2.5% in January, down from 2.6% in December—the first decline since September.
- A similar trend was seen in core inflation, which also rose 0.3% month-over-month but fell sharply on an annual basis to 2.6%, down from 2.9% in December. This marks the lowest level since March 2021.
By the Numbers:
- Price Growth: Monthly inflation rose 0.3% in January, equaling December’s increase.
- Annual Inflation Rate: Slowed to 2.5% in January, down from 2.6% in December.
- Core Inflation: Dropped significantly to 2.6% annually in January from 2.9% in December—the lowest level in nearly four years.
Income vs. Spending: Personal incomes surged 0.9% in January, up from 0.4% in December, marking the largest gain in a year. Despite this, personal spending fell 0.2%, marking the first decline since March 2023 and only the third negative month since May 2020.
The Big Picture: Even with incomes outpacing price growth, consumers appear to be pulling back. January’s decline in personal spending suggests that inflation-fatigued households may be hitting their limit.
- Consumers cut back most on discretionary categories, including car parts, recreational goods, appliances, furniture, and clothing—items often seen as “nice to haves” rather than essentials.
What They’re Saying: Economist Heather Long summed it up on Twitter: “It’s just one month (and it was the month of wildfires and snowstorms). But we need to watch consumption closely. Consumers may finally be pulling back.”
Bottom Line: As the saying goes, “the cure for higher prices is higher prices.” January’s data suggests that this theory may be playing out in real time.
