US inflation slows, but Fed's wary of spending slump
Illustrative photo: Inflation slows down in the US (Getty Images)
Inflation in the US went down slightly in January, but people spent less money than expected, making it harder for the Federal Reserve to decide on cutting interest rates, according to The New York Times.
The Fed’s preferred measure of inflation showed a 2.5 percent increase compared to last year, which is a bit lower than December's 2.6 percent but still above the 2 percent target they want.
The “core” inflation rate, which ignores food and energy prices, also rose by 0.3 percent in January, putting the yearly increase at 2.6 percent. This matched economists' predictions and supported the Fed’s cautious approach to lowering interest rates, which currently range from 4.25 to 4.5 percent.
Unexpectedly, consumer spending fell by 0.2 percent in January, even though experts expected a small increase. When adjusted for inflation, spending dropped by 0.5 percent, the sharpest decline in almost four years.
Economist Thomas Ryan suggested that "unseasonably severe winter weather" could be part of the reason, but also warned that the Fed’s job will become "trickier if January’s sharp decline in consumption was a sign of consumer strength buckling.”
Federal Reserve officials are being careful about cutting interest rates. Beth Hammack, president of the Federal Reserve Bank of Cleveland, said it’s “far from a certainty” that inflation will go down soon and warned about “upside risks to the inflation outlook.” She suggested the Fed should keep interest rates steady “for some time.”
These mixed signals make it hard for the Federal Reserve to decide the best course of action, as they need to control inflation while supporting consumer spending. This comes after a moderate increase in 2024 inflation rates, which raised concerns among consumers and businesses. Despite inflation being lower than in 2022, it remains above the Federal Reserve’s target, prompting cautious decision-making on future rate cuts.
