Washington
CNN
 — 

In a notable change, American consumers reduced their spending last month for the first time since August. This shift came as persistent inflation took its toll and severe weather hindered economic activities.

According to data released by the Commerce Department on Friday, retail sales fell 0.9% in January compared to the previous month. This decrease marks a significant decline from the upwardly adjusted 0.7% increase observed in December and falls short of economists’ predictions, which anticipated a 0.4% drop. These figures account for seasonal variations but do not factor in inflation.

Consumer spending across various sectors contracted last month, with specialty retail and automobile sales experiencing the most significant reductions—down 4.6% and 3%, respectively.

As markets opened on Friday, US stock indexes showed minimal movement, with all three major indices rising by just 0.1%.

A critical metric that excludes fluctuating components, known as the “control group,” saw a decline of 0.8% in January. Interestingly, spending at dining establishments and department stores remained in the positive range during the same period.

Sales from retail and food services represent roughly one-third of overall consumer expenditure in the US. This spending is a crucial driver of the American economy, accounting for around 70% of its total output.

Although inflation has significantly decreased from its peak of 40 years in summer 2022, it has recently shown signs of stagnation. This is largely why the Federal Reserve is pausing further interest rate reductions after implementing three cuts last year.

Inflation concerns could escalate if President Donald Trump follows through on his pledge to impose 25% tariffs on goods from Mexico and Canada starting March 1. The administration is also considering the possibility of implementing reciprocal tariffs in April. Most economists believe that these significant tariffs would likely increase price pressures in the US, contradicting the administration’s assertion that foreign nations would bear the cost.

While government retail statistics adjust for seasonal fluctuations, recent unusually cold weather has greatly influenced consumer spending habits, particularly in January.

This suggests that the latest spending figures may not fully capture the current state of the US consumer market. The decline in January also follows a notable increase in December.

“While the decline was significant, various factors indicate that there is no reason for alarm,” remarked Robert Frick, corporate economist at Navy Federal Credit Union, in an analysis released on Friday. “Part of this can be attributed to adverse weather conditions, and some can be linked to a drop in auto sales in January following an extraordinary surge in December spurred by generous dealer incentives. Given that December’s revisions showed robust gains, the general trend in consumer spending remains strong.”

January also witnessed devastating wildfires in Los Angeles, which may have caused residents in the nation’s second-largest city to limit their movements.

“We need to monitor February’s data to determine whether this indicates a trend of more cautious spending or if it was merely a temporary reaction to weather conditions, followed by a rebound,” stated James Knightley, chief international economist at ING, in commentary shared on Friday.

The recent report does not significantly influence the Federal Reserve’s stance.

Market analysts remain highly confident that the central bank will maintain its current position during its upcoming meeting on March 18-19, according to futures trading. This confidence arises after the Federal Reserve paused rate cuts last month, primarily due to stronger-than-anticipated inflation data and a stable job market, evident from a low unemployment rate of 4%.

For the Federal Reserve to initiate another round of rate cuts, there would need to be clear signs of inflation moving back toward the 2% target, a significant deterioration in the job market, or a combination of both, as Fed Chair Jerome Powell indicated during his recent testimony to Congress regarding monetary policy.

The most unpredictable variable for the Federal Reserve this year is the Trump administration’s policies, including stringent tariffs, mass deportations, deregulation, and reducing the size of the federal workforce. The overall impact of these policies on the US economy remains uncertain.

“In my opinion, until we have more definitive information, it’s challenging to make a judgment on our policy direction or the pace of changes needed,” said Atlanta Fed President Raphael Bostic during an Atlanta event. Notably, Bostic does not participate in policy votes this year.