US retail spending plunged last month, falling for the first time since August

American shoppers pulled back on their spending last month for the first time since August as stubborn inflation continued to bite and harsh weather curbed economic activity.

Retail sales plunged 0.9% in January from the prior month, the Commerce Department said Friday. That’s down sharply from December’s upwardly revised 0.7% gain and well below economists’ expectations of a 0.4% decline. The figures are adjusted for seasonal swings but not inflation.

Shoppers reined in their spending across multiple categories last month. Specialty stores and auto dealers were hit hardest, with spending falling 4.6% and 3%, respectively.

US stocks were mostly flat Friday morning at market open, with all three major indexes up just 0.1%.

A key measure that excludes volatile components, referred to as the “control group,” was down 0.8% in January. Spending at restaurants, bars and department stores remained in positive territory last month.

Sales at retailers and food establishments account for about a third of overall spending in the US. The American economy is driven by consumer spending, accounting for about 70% of economic output.

Inflation is down considerably from the 40-year highs of summer 2022, but it has shown signs of getting stuck in recent months. That’s a big reason why the Federal Reserve is holding off on additional interest rate cuts, after delivering three consecutive cuts last year.

Inflation could worsen if President Donald Trump keeps his promise of imposing 25% tariffs on Mexico and Canada as soon as March 1. The Trump administration is also weighing levying reciprocal tariffs in April. Most economists say Trump’s hefty duties would likely ramp up price pressures in the US, contrary to the Trump administration’s belief that foreign countries will pay for the tariffs.

‘No cause for alarm’

While the government’s retail figures are adjusted for seasonality, unusually cold weather in recent years has had an outsized impact on people’s spending behavior, typically in January.

That means the latest figures might not be fully representative of the US consumer’s health. January’s decline also comes after a strong gain in the prior month.

“The drop was dramatic, but several mitigating factors show there’s no cause for alarm,” said Robert Frick, corporate economist at Navy Federal Credit Union, in an analyst note Friday. “Some of it can be chalked up to bad weather, and some to auto sales tanking in January after an unusual surge in December due to fat dealer incentives. Especially considering December was revised up strongly, the rolling average of consumer spending remains solid.”

Last month was also when blazing wildfires ravaged Los Angeles, which may have kept Americans in the country’s second-largest city hunkered down.

“We will need to wait until the February data to see if this is the start of a more cautious consumer trend or indeed whether it was simply a weather related pull back and we get a subsequent big gain,” said James Knightley, chief international economist at ING, in commentary issued Friday.

Wall Street still sees no rate cut in March

Friday’s report doesn’t move the needle for the Fed.

Wall Street is still betting with near certainty that the central bank will stand pat at its March 18-19 meeting, according to futures, after central bankers paused rate cuts last month. That’s mostly because recent inflation data has come in hotter than expected and the job market is holding steady, with unemployment at a low 4%.

For the Fed to begin cutting again, it would need to see either inflation back on track toward the Fed’s 2% target, the job market weakening more than expected, or even a combination of the two, Fed Chair Jerome Powell told congressional lawmakers this week during his semiannual testimony on monetary policy.

The biggest wild card for the Fed this year is the Trump administration and its policies, such as stiff tariffs, mass deportations, deregulation and slashing the size of the federal government’s workforce. It’s not clear how those policies put together will ultimately affect the US economy.

“My view is until we have more clarity, it’s going to be impossible to make a judgment about where our policy should go and how fast and at what pace, and so we’re just going to have to get more information before we’re going to be able to move,” Atlanta Fed President Raphael Bostic said Wednesday at an event in Atlanta in reference to the Trump administration’s promises and actions. Bostic does not vote on policy moves this year.