US Consumer Spending Drops Sharply in January Amid Economic Uncertainty/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ US consumer spending fell 0.2% in January, marking the biggest drop since February 2021, according to Commerce Department data released Friday. Despite inflation easing to 2.5%, concerns over stagnant wages, rising debt, and looming tariffs have made Americans more cautious with their money. The decline follows a strong holiday season, where high credit card debt may have led to January cutbacks. President Donald Trump’s proposed tariffs on China, Canada, and Mexico could further drive up prices, creating uncertainty for businesses and consumers alike.
Consumer Spending Decline Quick Looks
- US consumer spending drops 0.2% in January, the sharpest decline in four years.
- Inflation falls to 2.5%, down from 2.6% in December, but tariff concerns loom.
- Consumer confidence plunges, with fears of higher prices and economic slowdown.
- Trump’s proposed tariffs on China, Canada, and Mexico could raise inflation by 0.8%.
- Federal Reserve watches inflation trends closely, as interest rate decisions remain uncertain.
- Americans cut back after a strong holiday season, with credit card debt at record highs.
US Consumer Spending Drops Sharply in January Amid Economic Uncertainty
Deep Look: US Consumer Spending Falls as Inflation Eases but Tariff Fears Grow
Consumer spending in the United States took an unexpected hit in January, dropping 0.2% from the previous month—the steepest decline since February 2021. While inflation continues to cool, economists warn that rising uncertainty over tariffs, job security, and long-term economic stability may be forcing Americans to tighten their wallets.
Spending Slows as Inflation Cools
The Commerce Department’s report, released Friday, showed that despite inflation falling to 2.5%, Americans cut back on discretionary purchases, particularly in retail, dining, and entertainment.
“Increased uncertainty surrounding trade, fiscal, and regulatory policy is casting a shadow over the outlook,” said Lydia Boussour, a senior economist at EY.
Meanwhile, core inflation, which excludes volatile food and energy prices, dropped to 2.6%—its lowest level since June. This should ease pressure on the Federal Reserve, which has been closely monitoring inflation trends to determine future interest rate decisions.
Holiday Shopping Hangover & Rising Debt
One reason for the decline? Consumers may be recovering from a holiday spending spree. Many Americans racked up credit card debt in December, and January’s pullback could be a natural correction.
“After a strong holiday season, it’s not surprising to see consumers taking a step back,” said an analyst at Wells Fargo.
Additionally, wages rose 0.9% in January, largely due to cost-of-living adjustments for Social Security beneficiaries. However, many households are using their extra income to pay off debt rather than spend.
Trump’s Tariffs: A Threat to Inflation and Consumer Confidence
Even as inflation trends downward, Trump’s aggressive tariff policies could push prices back up. The White House has announced plans to:
- Double tariffs on Chinese imports to 20%.
- Impose a 25% tariff on Canadian and Mexican goods starting next week.
The Federal Reserve’s Boston branch recently estimated that these tariffs could increase core inflation by as much as 0.8 percentage points.
“A big concern is whether tariffs will push up inflation or slow the economy—or both,” the report warned.
In 2018-19, Trump imposed tariffs on a smaller range of goods, and while inflation remained steady, economic growth slowed, leading the Fed to cut interest rates. This time, with tariffs targeting three of America’s largest trade partners, the effects could be more severe.
Consumer Confidence Drops Amid Economic Uncertainty
Fears of rising prices and job losses have already shaken consumer confidence, reversing modest post-election gains. Trump’s proposed layoffs of federal workers, which could cost hundreds of thousands of jobs, are adding to public anxiety.
“Americans expect inflation to move higher in the coming months,” said a University of Michigan survey. “That could become a self-fulfilling prophecy if consumers accelerate purchases in fear of rising costs.”
What’s Next?
With inflation cooling but spending slowing, the Federal Reserve will be watching closely. If Trump’s tariffs drive inflation higher, the Fed may delay interest rate cuts, further impacting consumer confidence and business investment.
For now, the US economy remains on uncertain footing, as Americans brace for potential price hikes and market instability in the months ahead.
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