US consumers tighten belts despite income surge; largest spending drop in 4 years

US consumers reduced their spending by 0.2% last month from December, marking the sharpest monthly decline since February 2021. The Commerce Department data, released on Friday (February 28) suggests that while unseasonably cold weather may have played a role, the pullback also signals growing consumer caution amid rising economic uncertainty, AP reported.At the same time, personal income jumped 0.9%, well above the estimated 0.3%, driven by wage growth and government benefits. However, despite higher earnings, consumers appeared to hold back on discretionary purchases, potentially reflecting concerns about future economic conditions.

Inflation eased further, with the Personal Consumption Expenditures (PCE) Price Index rising 2.5% year-on-year, down from 2.6% in December. Core PCE, which excludes food and energy, fell to 2.6%, the lowest level since June 2023, from 2.8% previously, the AP report highlighted.

On a monthly basis, core prices increased 0.3%, compared to December’s increase of 0.2%The Federal Reserve, which closely tracks the PCE index, may find reassurance in the continued inflation cooldown. However, a key risk on the horizon is President Donald Trump’s tariff plans, which analysts warn could drive inflation back up.

Trump announced on Thursday (February 27) that he would double tariffs on Chinese imports to 20% and impose 25% import taxes on Canada and Mexico starting next week. A Federal Reserve Bank of Boston study estimated that such tariffs could push core inflation up by as much as 0.8 percentage points.

Adding to the uncertainty, Trump is calling for widespread layoffs of federal workers, which could lead to hundreds of thousands of job losses and potentially raise unemployment.

“With trade, fiscal, and regulatory uncertainty increasing, the economic outlook is facing fresh headwinds,” said Lydia Boussour, Senior Economist at EY, AP report added.

(With agency inputs)