Consumer spending in the United States increased solidly in January, driven largely by higher prices, while the ongoing Middle East conflict threatens to push inflation even higher and delay interest rate cuts by the Federal Reserve.
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According to data released by the US Department of Commerce, consumer spending rose by 0.4 percent in January, matching December’s increase and slightly exceeding economists’ expectations.
However, when adjusted for inflation, real consumer spending rose only 0.1 percent, suggesting households are becoming more cautious amid rising costs.
Economists say the surge in energy prices linked to the conflict involving Iran, Israel and the United States could further increase inflation and slow economic growth.
Rising gasoline prices have already begun affecting consumers. According to data from AAA, retail gasoline prices have jumped more than 21 percent to about $3.63 per gallon since the conflict began.
The price pressures come at a time when inflation was already elevated due to tariffs introduced by Donald Trump. The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, increased 0.3 percent in January after rising 0.4 percent in December.
On an annual basis, PCE inflation rose 2.8 percent, while core inflation — which excludes volatile food and energy prices — climbed to 3.1 percent, its highest level since March 2024.
At the same time, economic data suggests some slowdown in broader economic activity. Orders for non-defense capital goods excluding aircraft — a key measure of business investment — remained unchanged in January, according to the US Census Bureau.
Economic growth in the fourth quarter also slowed more than previously estimated, with gross domestic product expanding at an annualised rate of just 0.7 percent, sharply lower than earlier estimates.
Economists now expect the Federal Reserve to keep interest rates steady in the 3.50 to 3.75 percent range at its upcoming meeting, with financial markets predicting that any rate cut may not occur until September.
Despite rising household incomes, analysts warn that higher fuel costs, volatile stock markets and global uncertainty could weigh on consumer confidence and spending in the months ahead.
