The Federal Reserve’s preferred inflation gauge cooled as expected in January; however, the good news came with a red flag for the US economic engine: Consumers pulled back their spending by the most in nearly four years.

Surveys showing a rise in consumer inflation expectations mean the central bank needs to keep its focus on ensuring price pressures are contained.

Inflation expectations vary by political affiliation, surveys show, but fears of inflation can be self-fulfilling.

The first report of the new year found that consumer sentiment had fallen, while inflation concerns had risen.

The Consumer Prices Index (CPI) rose by 3.0% in the 12 months to January 2025, up from 2.5% in the 12 months to December 2024. On a monthly basis, CPI fell by 0.1% in January 2025, compared with a 0.6% fall in January 2024.

U.S. consumer spending unexpectedly fell in January, but a pick up in inflation could provide cover for the Federal Reserve to delay cutting interest rates for some time.

The Federal Reserve's preferred measure of underlying US inflation, the so-called core personal consumption expenditures price index, rose 0.3% from December, while household spending fell 0.5% for the month,