US Consumer Spending Shows Mixed Signals as Inflation Pressures Persist

Key Takeaways

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Spending Declines in Early 2025: January retail sales fell 0.9% month-over-month, with February showing a 3.4% year-over-year drop (adjusted for Leap Year).

Inflation-Driven Trade-Down Behavior: Three-quarters of consumers reduced spending on discretionary items like apparel and electronics, opting for lower-priced brands and private labels.

Experience Over Material Goods: 58% of Americans prioritize spending on travel and dining over physical products, with Gen X and millennials leading travel splurges.

Financial Strain and Optimism Divide: While 46% of consumers felt economically optimistic, half cited rising prices as their top concern, particularly older demographics.

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Consumer Spending Trends in Early 2025

Declining Retail Activity

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January marked the first monthly drop in consumer spending since early 2023, with retail sales excluding vehicles falling 0.4%.

February’s 3.4% year-over-year decline (flat when adjusted for Leap Year) was exacerbated by a grassroots “economic blackout” on February 28, which saw debit card spending plunge 10.7%. Analysts attribute part of the weakness to unseasonable weather and financial strain among lower-income households.

Inflation-Driven Adjustments

Consumers across income groups are tightening budgets:

• Trade-Down Strategies: 75% of shoppers opted for cheaper alternatives, with low-income households trading down on meat and dairy products at higher rates.

• Splurge Shifts: While fewer consumers planned discretionary splurges post-holidays, travel emerged as a priority, particularly among Gen X and high-income millennials.

Economic Sentiment and Spending Intentions
Despite stable inflation and low unemployment, consumer confidence remains fractured:

• Optimism vs. Pessimism: 46% of consumers felt optimistic, but inflation concerns lingered, especially among older generations.

• Sector-Specific Trends: Food services and gasoline stations saw modest gains, while categories like home exercise equipment and gaming consoles declined sharply.

Outlook and Implications
While forecasts suggest moderate spending growth in 2025 due to wage gains and savings buffers, analysts warn of risks from tariffs and persistent inflation.

Retailers are advised to emphasize affordability, flexible payment options, and experiential value to align with shifting priorities.