Inflation ticked up in January, while consumer spending surged

Meanwhile, consumers continued to feel better in January.


Inflation’s cooldown was halted in January, as the Fed’s preferred gauge shows that prices across the economy ticked up slightly to start the year.

The U.S. Bureau of Economic Analysis released the following data for January 2023 on personal consumption expenditures:

Consumer spending increased 1.8% in January, showing a boost to begin the year. It was driven by an increase in compensation, as personal income rose 0.6%. This underscores how a strong labor market is continuing to drive consumer spending.

Inflation rose at a more marked pace of 0.6% for the month, showing an uptick on a monthly basis after several more modest increases. On an annual basis, inflation also ticked back up to rise 5.4% when compared to January 2022. That was a slight increase from 5.3% in December, which came after months of decline. It’s a sign that inflation is remaining stubborn, even as it has come down from its summer highs.

Core inflation, which leaves out the volatile food and energy measures, followed the same trend as overall inflation. It increased 0.6% month-over-month, which was even with overall inflation. On an annual basis, core inflation was 4.7%, also ticking up slightly from December’s 4.6%.

The takeaway: While inflation has come down, it remains high and is not yet in the rearview mirror. The increase in consumer spending shows demand remains strong, even as the Federal Reserve raises interest rates to attempt to cool the economy and bring inflation under control. A hot job market remains a tricky part of that equation for policymakers, but will likely continue to keep people spending, especially as wages continue to grow.

Consumer sentiment

Consumers are continuing to feel a bit better. Sentiment rose 3% on a monthly basis in February according to the University of Michigan’s final reading for the month.

It’s the third straight monthly increase, bringing consumer sentiment out of the all-time lows it saw in June 2022. In particular, there was a 12% increase in consumers’ short-term outlook on the economy. Still, sentiment remains below historical averages.

When it comes to inflation, expectations ticked up slightly to a rate of 4.1%. That’s higher than 3.9% in December, but below 4.4% in November. Given the slight uptick in actual data for January, it seems expectations are mirroring the inflation rate itself.

“Consumers continued to exhibit considerable uncertainty over short-run inflation, and thus their expectations may be unstable in the months to come,” wrote University of Michigan Survey of Consumers Director Joanne Hsu.

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