The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, showed a cooling trend in January 2025, rising 2.5% annually compared to 2.6% in December. This marks progress toward the Fed’s 2% inflation target, though it remains above pre-pandemic levels. Core PCE, which excludes volatile food and energy prices, also slowed to 2.6% from 2.9% in December.
However, this positive development on inflation was accompanied by a significant decline in consumer spending. Spending fell by 0.2% in January and dropped 0.5% when adjusted for inflation, marking the steepest monthly decline since February 2021. The pullback was most pronounced in goods like autos and other durable items, while spending on essentials and leisure activities like dining out remained steady24. Economists attribute this slump to factors such as post-holiday caution, adverse weather conditions, and reduced auto dealer incentives after strong December sales.
Despite the drop in spending, personal incomes rose by 0.9%, and the personal saving rate increased to 4.6%, up from 3.5% in December. This suggests that consumers are opting to save rather than spend amid economic uncertainties. Analysts believe this could be a temporary adjustment, with potential for a rebound if the labor market remains strong and external factors like natural disaster recovery support economic activity.
Looking ahead, while inflation trends are encouraging, economists warn that achieving the Fed’s 2% target may take until 2027 due to persistent price pressures. The Fed is expected to hold interest rates steady in March but may consider cuts later in the year if inflation continues to ease