Amid heightened volatility and liquidity concerns, U.S. consumer spending took an unexpected hit in January, registering its steepest monthly decline in nearly four years. Inflation-adjusted personal consumption expenditures (PCE) fell 0.5%, with durable goods purchases plunging 3.0%, led by a sharp drop in auto sales. Non-durable goods spending edged 0.2% lower, while services spending slowed to 0.3% growth - half the pace of the previous month. The downturn raises concerns over whether this signals a broader economic slowdown or a temporary pullback following strong holiday spending.
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Despite softer consumption, personal income rose 0.9%, driven by wage growth and a cost-of-living adjustment for Social Security recipients. Inflation-adjusted disposable income rose 0.6%, pushing the savings rate to its highest level since June. While rising incomes could support demand, market fragility and impending tariff adjustments may weigh on consumer sentiment in the coming months, increasing the risk of a more sustained slowdown.

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Inflation and Fed Policy: Positive Signals Amid Growing Market Anxiety

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While declining consumer spending hints at potential economic softness, the latest inflation data presents a more positive picture. The core PCE index, the Federal Reserve’s preferred gauge, rose 0.3% month-over-month and 2.6% year-over-year, maintaining its slowest annual pace since early 2021. Core services prices (excluding housing and energy) climbed 0.2%, while goods prices (excluding food and energy) posted their largest monthly increase in over a year at 0.4%.
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The inflation reading keeps the Fed in a delicate balancing act. While price pressures appear to be moderating, the potential impact of Trump’s proposed tariffs and shifting trade policies could alter inflation expectations. Market reactions were mixed—Treasury bond prices rose with higher demand, while the S&P 500 opened lower, reflecting ongoing uncertainty about the Fed’s next move. With February payroll data due on March 7, investors remain cautious as policymakers navigate a complex economic landscape.

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