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Consumer spending slowed in January from a very high rate in December, and inflation cooled less than economists had hoped.

Personal income increased 1% in January, the Bureau of Economic Analysis said Thursday. But despite such a big gain, Americans spent just 0.2% more in January than in December, a big slowdown from the 0.7% growth a month before. Consumer prices, excluding food and energy, were up 2.8% from a year earlier, only slightly slower than the month before.

The big takeaway from the data is that inflation is putting pressure on consumers, who are responding by being more cautious about their spending habits. “The trend towards softer inflation is bottoming out,” said Steven Ricchiuto, US Chief Economist at Mizuho Securities in New York. “This means you’re probably not going to get much additional relief from inflation for the consumer moving forward.”

Higher inflation could lead the Fed to delay cutting interest rates, but that possibility is still on the horizon. The recent inflation reports justifies the Fed’s willingness to hold off on their planned intervention. Two more reports on personal income remain before the Fed’s meeting in May, where they could decide to cut interest rates.

The prices for goods are rising more slowly and even falling in some cases, while the cost of services continues to rise at a steady pace, according to Kathleen Bostjancic, senior vice president and chief economist at Nationwide Mutual. American households spend more of their income on services, and seem to be willing to pay top dollar for quality service.

However, there are signs that consumers are beginning to struggle with their budgets. Adjusted for inflation, consumer spending was down by one tenth in January, confirming concerns that people were going to tighten their belts. The significant reduction in spending could be the natural aftermath of the end of a bustling holiday season. The savings rate was still very low at 3.8% compared to the pre-pandemic rate, which was roughly double that. Credit card usage has ticked up recently and so have auto delinquency rates, both pointing to a consumer that is over-extended. Lower-income households are feeling the stress most.

All things considered, US economic activity still looks strong, thanks in no small part to the momentum generated in closing last year. The job market is incredibly solid and shows no sign of wavering. As the year progresses, consumers could lose their inhibition and start enjoying their blossoming incomes a bit more by splurging on goods and services.