Weekly Economic Snapshot: Inflation Heats Up as Consumer Spending Cools

Rising prices and softer consumer spending defined last week’s economic data.  The latest reports on consumer and wholesale prices indicated persistent inflation pressures, while retail sales posted their largest drop in nearly two years. Despite these headwinds, the market closed out the week inches from a new all-time high while the Fed remains in no hurry to cut rates.

Inflation continued to heat up last month, reinforcing the Fed’s cautious stance on rate cuts. The Consumer Price Index (CPI) rose 3.0% in January, up from 2.9% in December and above the expected 2.8% increase. On a monthly basis, prices climbed 0.5%, the largest gain since August 2023. The rise was driven by higher costs for shelter, gasoline, and food, pushing inflation above the 2% range for the first time since May.

Core inflation, which is more closely watched since it excludes volatile items like food and energy, reversed the previous month’s easing. Core CPI rose 3.3% annually and 0.4% from December, the highest monthly increase since April 2023. Both readings were higher than expected.

With inflation accelerating for the fourth straight month, progress toward the Fed’s 2% target appears to have stalled.  Combined with January’s strong jobs report, the latest data suggests the Fed will remain in a wait-and-see mode, further delaying any potential rate cuts.

Wholesale inflation remained elevated in January, reaching its highest level in nearly two years. The Producer Price Index (PPI) rose 3.5% year-over-year, exceeding the expected 3.2% increase. On a monthly basis, prices climbed 0.4%, also above the 0.3% forecast. Core PPI, which strips out food and energy, rose 3.6% annually, higher than the 3.3% forecast, while monthly core prices increased 0.3%, as expected.

Despite the hotter-than-expected headline number, a closer look suggests a softer inflation picture in areas that influence the Fed’s preferred PCE price index. Specifically, health care services and airfares declined last month. However, elevated producer-level inflation raises concerns that higher costs may eventually be passed to consumers, keeping inflation risks in focus.

American consumers pulled back on spending in January, marking the first decline in five months. Retail sales fell 0.9%, a steeper drop than the expected 0.2% decline, and the largest monthly decrease in nearly two years. Core retail sales, which exclude autos, fell 0.4%, missing expectations for a 0.3%  gain. Meanwhile, control purchases, a key input for GDP calculations that strips out volatile categories, dropped 0.8%, suggesting potential headwinds for first-quarter economic growth.  A bright spot to the report showed December’s sales were revised higher.

Several factors likely contributed to the pullback. Severe weather, including freezing temperatures and California’s wildfires, may have dampened activity. Additionally, some consumers may have frontloaded purchases in prior months in anticipation of new tariffs. While the January decline was larger than expected, consumer spending has been resilient in recent months, and future month’s data will help determine whether this is a temporary dip or the start of a broader slowdown.

Retail sales could impact the SPDR S&P Retail ETF (XRT B+), VanEck Retail ETF (RTH A-), Amplify Online Retail ETF (IBUY C+), and ProShares Online Retail ETF (ONLN B).

The S&P 500 ended its two-week skid, finishing just inches below its record close from earlier in the year. The index is up 4.2% year to date. Meanwhile, the S&P Equal Weight Index rose 0.5% from the previous week and is up 3.5% year to date.

The 10-year Treasury yield finished the week at 4.47% while the 2-year note finished at 4.26%.

According to the CME FedWatch Tool, markets currently anticipate just one rate cut in 2025 coming at the July 30th meeting, with a second coming in early 2026 and a third at the end of 2026.

This week’s data will provide fresh insight into the housing market, regional manufacturing activity, and consumer sentiment. Reports on homebuilder confidence, housing starts, building permits, and existing home sales will offer a clearer picture of how rising mortgage rates and affordability challenges are shaping the real estate market. Meanwhile, updates from the Empire State and Philadelphia Fed manufacturing surveys will shed light on regional business conditions. Finally, the latest consumer sentiment report will reveal whether inflation concerns and economic uncertainty are weighing further on household confidence.

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