US consumer spending takes a hit as inflation worries and tariff fears put Americans on edge; but what will happen to the economy?

Although US inflation eased slightly in January, slowing to 2.5% from 2.6% the previous month, a big red flag is that consumer spending declined most in almost four years, according to a report.

Consumer spending drops

Consumer spending declined unexpectedly by 0.2% in January and, inflation-adjusted declined by 0.5%, it's the largest monthly decline since February 2021, CNN reported.

According to the report, big-ticket items such as cars suffered the largest decline, while consumers kept on spending on more basic goods such as shelter and gasoline, as well as leisure activities such as dining out.

Americans focus on saving

According to CNN, following a year of rampant price increases, unemployment, sluggish business investment, slowdown in GDP growth, consumers chose to save rather than spend.

Christopher Rupkey, chief economist at FwdBonds, said consumers are "scrambling to process the winds of change coming out of Washington, and have apparently decided to sit it out and wait,” as quoted by CNN.

While incomes rose 0.9% in January, consumers saved their money instead of spending. According to CNN, the personal saving rate skyrocketed in January, jumping to 4.6% from 3.5%.

According to Beth Ann Bovino, US Bank’s chief economist, “Spending was much lower than expected; however, it came after pretty strong readings in the prior months — partly tied to holiday spending as well as the rebuild from the hurricanes that happened in October and September,” as quoted by CNN.

Prices in the US had risen 10% above pre-pandemic levels as of December 2024, according to the Federal Reserve Bank of St. Louis.

Tariff concerns fuel consumer caution

Americans are cutting back on spending as concerns about inflation grow, fueled by US president Donald Trump's proposed 25% tariffs on Mexico and Canada, along with an additional 10% tax on Chinese goods, reported CNN.

Bill Adams from Comerica pointed out that the drop in consumer spending and the rise in the trade deficit could impact the economy's growth in the first quarter, reported CNN. He claimed, "Import growth will likely be strong in February as well, as companies race to get ahead of decisions on tariff increases," as quoted by CNN. But he also mentioned that "this is probably a temporary drag on GDP, since much of these imports will be companies pulling forward purchases that they otherwise would have made later in the year,” as per CNN.

FAQs

Why did consumer spending drop in January?
Consumer spending dropped mainly due to economic uncertainty. People focused more on saving and cutting back on big-ticket purchases.

What’s behind the jump in the personal saving rate?
Increased caution, along with rising incomes, led to a higher savings rate in January. People are holding onto their money for potential future needs amid economic uncertainty.