Fed's Favorite Inflation Measure Drops

US consumers cut back sharply on spending last month, the most since February 2021, even as inflation declined, though stiff tariffs threatened by the White House could disrupt that progress. Americans cut their spending by 0.2% in January from the previous month, the Commerce Department said Friday, likely in part because of unseasonably cold weather. Yet the retreat may be hinting at more caution by consumers amid rising economic uncertainty.

• Inflation declined to 2.5% in January compared with a year earlier, down from 2.6% in December, the government said. Excluding the volatile food and energy categories, core prices dropped to 2.6%, the lowest since June, from 2.9%, the AP reports.

• One other bright spot in the report was that incomes jumped 0.9% in January from December, fueled in part by a large annual cost of living adjustment for Social Security beneficiaries.
• Inflation spiked in 2022 to its highest level in four decades, causing the Federal Reserve to rapidly raise interest rates to tame prices. It has since fallen from a peak of 7.2%. Last month's decline could reassure Fed officials that inflation is still slowly cooling. The Fed prefers Friday's measure to the more widely-known consumer price index, which rose for the fourth straight month in January to 3%. Friday's gauge calculates inflation slightly differently: For example, it puts less weight on the costs of housing and used cars.

• The key question preoccupying many American consumers, investors, and business executives is whether Trump's extensive tariff proposals will push prices higher in the coming months, the AP reports. Trump said Thursday he will double his recently-announced tariffs on Chinese imports to 20%, and will impose 25% import taxes on Canada and Mexico next Tuesday. The three countries are the United States' top trading partners.
• A big concern is whether tariffs will push up inflation, or slow the economy, or—in a particularly toxic combination known as stagflation—both. A report from the Federal Reserve's Boston branch this month concluded that 25% tariffs on Canada and Mexico, along with Trump's initial 10% import taxes on China, could lift core inflation by as much as 0.8 percentage points.

(More inflation stories.)