US consumer spending rises in January as Iran war adds inflation risks
Synopsis
US consumer spending increased in January, but rising gasoline prices linked to the Iran conflict could add inflation pressures and delay Federal Reserve rate cuts.
US consumer spending increased in January as higher prices lifted household outlays, while the ongoing Middle East conflict involving Iran threatens to add to inflation pressures, strengthening expectations that the Federal Reserve will delay interest rate cuts.
Key highlights
- US consumer spending rose 0.4% in January, slightly above forecasts
- Real consumer spending increased just 0.1%, indicating price-driven growth
- PCE inflation rose 2.8% year-on-year, while core inflation climbed to 3.1%
- Rising oil prices from the Iran conflict threaten to push inflation higher
- Markets expect only one Fed rate cut this year, likely in September
Consumer spending increases but real growth modest
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4% in January, matching December’s gain, according to the Commerce Department’s Bureau of Economic Analysis.
Economists surveyed by Reuters had expected spending to rise 0.3%.
However, when adjusted for inflation, real consumer spending increased only 0.1%, indicating that much of the rise was driven by higher prices rather than stronger demand.
Spending growth was led by healthcare, housing and utilities, financial services and insurance, reflecting rising costs in those categories.
Households also increased spending on food, recreational goods, vehicles, furnishings and durable household equipment, partly reflecting the pass-through from tariffs.
Signs of caution among consumers
Despite the overall increase, several categories showed signs of weaker demand.
Spending on discretionary services, including restaurants, bars, hotels and motels, declined in January.
Growth in spending on recreation and transportation services also slowed, while purchases of clothing and footwear dropped.
The data suggests that some households are becoming more cautious about discretionary spending.
Gasoline prices surge amid Iran conflict
Economists warn that rising energy prices linked to the conflict involving Iran could further weigh on consumer spending.
Retail gasoline prices have climbed more than 21% to $3.63 per gallon since the conflict began, according to data from motorist advocacy group AAA.
Higher fuel costs could reduce household purchasing power and slow spending growth in the coming months.
The conflict has also increased volatility in financial markets, raising concerns that declining stock prices could reduce wealth among higher-income households, who account for a large share of consumer spending.
Income and savings rise
Household income increased 0.4% in January, supported by wage gains and cost-of-living adjustments for seniors and Social Security recipients.
Disposable income rose 0.9%, while the saving rate climbed to 4.5%, the highest level in six months, from 4.0% in December.
Consumers are also expected to receive higher tax refunds following the implementation of President Donald Trump’s tax cuts, which could provide additional support for spending.
Inflation remains elevated
Inflation was already elevated before the conflict due in part to tariffs.
The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.3% in January, after increasing 0.4% in December.
On an annual basis, PCE inflation increased 2.8%, slightly down from 2.9% in December.
Core PCE inflation, which excludes food and energy, rose 0.4% in January, pushing the year-on-year rate to 3.1%, the highest since March 2024.
Prices increased sharply for furnishings, durable household equipment, recreational goods and vehicles, while services inflation was driven by healthcare and transportation costs.
Oxford Economics estimates that the Iran conflict could add at least 0.3 percentage point to headline inflation in March through higher gasoline prices.
Fed faces policy dilemma
The combination of rising inflation pressures and slowing economic indicators presents a challenge for the Federal Reserve.
Financial markets currently expect the Fed to keep its benchmark interest rate in the 3.50%–3.75% range at next week’s meeting, with only one rate cut anticipated this year, likely in September.
Economists warn that the spike in energy prices could slow economic activity while pushing inflation higher.
“We now see a steep rise in inflation and weaker economic activity in the second quarter due to the spike in gasoline and energy prices,” said Kathy Bostjancic, chief economist at Nationwide.
Business investment signals weaken
Separate data from the Commerce Department’s Census Bureau showed that core capital goods orders, a key proxy for business investment, were unchanged in January after rising 0.8% in December.
Economists had expected a 0.5% increase.
Shipments of these goods fell 0.1%, while orders for durable goods, items meant to last at least three years, were also unchanged following a 0.9% decline in December.
GDP growth revised lower
The Commerce Department also revised fourth-quarter economic growth sharply lower.
US gross domestic product grew at an annualized rate of 0.7%, down from the earlier estimate of 1.4%.
The downgrade reflected weaker estimates for consumer spending, exports, government investment and business spending.
The economy had expanded at a 4.4% pace in the third quarter, highlighting a significant slowdown.
Consumer spending outlook
Economists say the trajectory of consumer spending and inflation will depend heavily on energy prices and the duration of the Middle East conflict.
While higher oil prices could temporarily slow consumer spending, they may also boost investment in domestic energy production.
“For a net exporter like the US, the impact of the oil price shock may ultimately be muted,” said Paul Ashworth, chief North America economist at Capital Economics.
FAQs
Q1: How much did US consumer spending increase in January?
Consumer spending rose 0.4% in January, slightly higher than economists’ expectations.
Q2: What is the current inflation rate in the US?
The PCE inflation rate was 2.8% year-on-year in January, while core PCE inflation reached 3.1%.
Q3: Why is the Iran conflict affecting inflation?
The conflict has pushed oil and gasoline prices higher, increasing transportation and energy costs across the economy.
Q4: What does this mean for Federal Reserve interest rates?
Markets now expect the Fed to delay rate cuts, with only one reduction likely later in the year.
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