Savings Up as Consumers Pare Spending in January and Gird for Inflation

Data from the Bureau of Economic Analysis released Friday (Feb. 28) offers sobering food for thought for merchants, even as the financial standing of consumers improved.

A boost in consumers’ income and savings comes at the expense of ringing up sales at the register.

Personal income was up 0.9% in January, as measured month over month, although the annualized pace, at 4.6% from last January, is below the 5.1% boost in December.

Drill down a bit, and disposable income was also up 0.9%; year over year, the boost was 4.4%, a deceleration from the 4.9% in December. Despite the deceleration, disposable income continues to increase even when netting out the effects of inflation. Real disposable incomes inched up 0.6%, better than the 0.2% gain month over month in December.

As for spending, personal consumption expenditures decreased 0.2% month over month. This is the first time consumption measured in current dollars decreased month over month since March 2023. Adjusted by inflation, the decrease was 0.5%, the sharpest drop since February 2021. The net impact is that the personal savings rate as a share of disposable income jumped from 3.8 %to 4.6%, the biggest increase in the personal saving rate since January 2024.

The pause in real spending was most readily apparent in durable goods (down 3.4%) while spending on nondurables dipped at a milder pace (0.8%).

The January findings came a day after the BEA updated its estimates for fourth-quarter GDP. The price index for gross domestic purchases was revised from a 2.2% increase to 2.3%, while the personal consumption expenditures (PCE) price index rose 2.4%, up from the previously reported 2.3. These updates reflect refinements in the underlying data, indicating that inflationary pressures were slightly stronger than initially estimated. Overall, the BEA’s Q4 GDP 2.3% annual increase remained unchanged, slowing from the 3.1% year-over-year gains notched in the third quarter.

The January pullback may not be a one-off. Concerns about trade and tariffs led to the biggest monthly decline in consumer confidence since August 2021, per February data from The Conference Board. The slide was seen across all age groups. Four of the five components of the index showed greater pessimism.

While consumers’ assessment of present business conditions improved, their views of current labor market conditions, future business conditions, future income and future employment prospects worsened. Consumers’ average inflation expectations increased from 5.2% in January to 6% in February, so spending outlooks also tightened. Plans to spend money on items like electronics and cars declined.

The newest round of tariffs is slated to come into effect as early as next week. If tariffs are imposed, 26% of small businesses said they will raise prices and 9% said this would be their most immediate strategy to offset tariffs’ impacts. Nearly four times as many small retailers said they would rather discontinue a product they could not source domestically than raise prices, at least initially.

Might there be a double whammy of rising prices and less to choose from? For consumers, many of whom are already stretched with credit card debt (and nearing, if not touching, their limits), girding for inflation and tariffs has been, and likely will remain, key concerns as the newest bouts of trade uncertainty hit home.

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