Powell says Americans forced to 'economize' as stubborn inflation squeezes household budgets

• Retailers report consumers are trading down from brand names and buying less, with higher-income households that own real estate and stocks driving much of the economy while less-affluent households struggle
• The PCE inflation index reached an estimated 2.9% in December, up from a low of 2.2% in April, with the increase largely attributed to tariffs on imported goods boosting prices in the goods sector
• Powell expects tariff-related price increases to be one-time effects that will peak and decline over the course of the year, assuming no major new tariffs are imposed

Summary

Federal Reserve Chair Jerome Powell stated that American consumers are being forced to "economize" as persistent inflation continues to pressure household budgets. Speaking at a Wednesday press conference after the Fed held interest rates steady in January—following three consecutive 25-basis-point cuts to end 2025—Powell acknowledged a clear divide between affluent and struggling households.

Powell noted that higher-income households benefiting from rising real estate and stock values continue driving economic activity. However, retailers serving lower- and middle-income consumers report shoppers are "trading down" from brand names and reducing purchases to save money. "They're still consuming, but they're feeling it in a different way," Powell explained.

Key Data Points:

• The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, reached 2.8% in November, up from a low of 2.2% in April
• Headline PCE is estimated at 2.9% for December based on recent CPI data
• The Fed's inflation target remains 2%

Powell attributed elevated inflation readings primarily to tariffs imposed by the Trump administration on imported goods, stating these represent a "one-time price increase" in the goods sector. He expects tariff-driven price pressures to peak and decline throughout the year, assuming no major new tariffs are introduced. Services sector disinflation appears to be continuing.

The Fed chair emphasized that maintaining price stability and returning inflation to the 2% target is "the best thing we can do for people who are feeling that squeeze," addressing widespread affordability concerns raised by businesses and households through the Fed's extensive network of contacts.