By LUCIA MUTIKANI
WASHINGTON- US consumer spending unexpectedly fell in January while the annual increase in inflation slowed, supporting financial market expectations that the Federal Reserve would resume cutting interest rates in June.
But the moderation in annual inflation, which partly reflected last year’s high readings dropping out of the calculation, is unlikely to be sustained as President Donald Trump’s administration ratchets up tariffs on imports, which economists warned would raise prices. Consumers’ one-year inflation expectations soared in February.
“The good news is consumer inflation broke the curse of the January effect,” said Christopher Rupkey, chief economist at FWDBONDS. “The bad news is consumers are scrambling to process the winds of change coming out of Washington and have apparently decided to sit it out and wait.”
Consumer spending, which accounts for more than two-thirds of US economic activity, dropped 0.2 percent last month after an upwardly revised 0.8 percent increase in December, the Commerce Department’s Bureau of Economic Analysis said on Friday.
Economists polled by Reuters had forecast consumer spending gaining 0.1 percent after a previously reported 0.7 percent surge in December, when outlays were boosted by pre-emptive buying in anticipation of tariffs. When adjusted for inflation, consumer spending fell 0.5 percent, the biggest decline since February 2021.
Some of the weakness in consumer spending last month likely reflected the fading lift from front-running as well as a drag from unseasonably cold temperatures and snowstorms that engulfed large parts of the country. Wildfires, which scorched areas of Los Angeles, also probably hurt spending.
There was also weakness in spending at restaurants and bars, suggesting that consumers were tightening their purse strings.
Winter storms disrupted homebuilding last month and helped to curb job growth. The data are consistent with expectations for a slowdown in economic growth in the first quarter, which was reinforced by other data on Friday showing the goods trade deficit surged to a record high last month as businesses front-loaded imports to avoid duties.
