Consumers Cool on Spending Even as Inflation Slows

The headlines Thursday (Feb. 29) trumpet the fact that inflation rose in January at the rate most people expected — by 3% month on month.

The Personal Consumption Expenditures (PCE) price index is parsed by Wall Street and by the Federal Reserve in mulling when, and by how much, interest rates might be cut in the months ahead, if at all. And at this writing, stocks have opened higher, by about 0.5%.

Inflation, as measured year on year, has now slowed to 2.4%, as a headline reading, below the 3% level that’s been a psychological benchmark of sorts — and it’s within sight of the roughly 2% level that the Fed tends to target when it’s looking at cutting rates.

Spending Is Pressured?

But digging into the numbers reveals some puts and takes, where consumers seem to be taking a break, so to speak, from spending at the register. The release by the Bureau of Economic Analysis shows that personal income was up 1%, disposable personal income increased 0.3% (outpaced by inflation) and spending was down 0.1%. In the latter metric, notably, per the data, spending on food was up 0.5% even as overall consumer spending slipped overall. Prices for services increased 0.6% and prices for goods decreased 0.2%.

The personal saving rate in the most recent month was 3.8%, a slight bump from the 3.7% seen in December but below the 4.8% rate that had been seen as recently as this past summer.

In part the continued pressure on the saving rate is due to the boost in personal interest payments — which of course includes credit card debt. In January, personal interest payments totaled $573.4 billion, up from the $563.5 billion in December and leagues above the $500 billion recorded this past June.

The data for January indicate that inflation may be cooling, albeit at a pace that’s not enough to push consumers to feel more confident about spending more in the aisles or online to get items into their baskets or at the doorstep — i.e., at least in January, they’d likely shifted a bit to services and to keep putting food on the table.

PYMNTS Intelligence reported in the middle of February that consumers’ expectations regarding inflation are easing at least a bit.

The percentage of consumers anticipating ongoing inflation in retail prices in the next 12 months decreased from 64% in January 2023 to 57% in January 2024, despite surges in inflationary concerns in mid-2023. But, as we note, that still represents a significant majority, and caution around spending is showing up in the government’s official data. Separate data corroborates this, as the Census Bureau reported that January notched an 0.8% slide in retail sales. That was worse than estimates, where consensus had looked for a 0.3% decline from December’s levels.