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

Federal Reserve Chair Jerome Powell said that policymakers are hearing that a significant segment of American consumers are still looking to "economize" their purchases and trading down as they feel the effects of stubborn inflation on their household budget.

Powell spoke at a press conference Wednesday after the central bank left interest rates unchanged in January following consecutive cuts of 25 basis points at the Federal Reserve's three meetings to end 2025.

The chairman was asked about data suggesting the cost of living remains at the forefront of American households' concerns and how there is a distinction between wealthier consumers driving the economy and less-affluent households struggling to get by.

"There's something to it in that we know that higher-income households that tend to own real estate and tend to own stocks, securities, and those assets have been going up in value and increases in wealth do support spending over time, so that's clearly a part of the story," Powell said.

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"We also know that for some time now, for a year or more, we've been hearing from retailers, for example, that serve lower-income customers, whether it be food or the big box stores or any of that – they're saying the same thing, which is our consumers are looking to economize," Powell said. 

"They're trading down from brands, and they're buying less, and it's changing their buying habits, and that kind of thing. That's a reality of what we're seeing. They're still consuming, but they're feeling it in a different way," he added.

Powell also said that the central bank hears frequently about affordability concerns when it talks to businesses of various sizes as well as households, and that focusing on returning inflation to the Fed's 2% target is the best way to address those worries.

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"I would say more broadly on affordability, we have a vast network through the Reserve Banks and also through the Board of Governors where we talk to small and large businesses and households," he said.

"So we do hear a lot about affordability, and we take that very seriously and we take it to heart, because one of our jobs is price stability," Powell said. "The best thing we can do for people who are feeling that squeeze is to keep inflation under control, and, frankly, to finish the job of getting inflation back down to 2%."

The Fed's preferred inflation gauge, the personal consumption expenditures (PCE) index, was at 2.8% in November and trended higher from a low of 2.2% last April, according to data from the Commerce Department's Bureau of Economic Analysis. Powell noted that estimates based on the latest consumer price index (CPI) inflation data suggest that headline PCE reached 2.9% in December.

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He attributed the rise in the pace of price growth to higher tariffs, which are taxes on imports the Trump administration is using as part of its trade agenda.

"These elevated readings largely reflect inflation in the goods sector, which has been boosted by the effects of tariffs. In contrast, disinflation appears to be continuing in the services sector," the chairman noted in his opening statement.

He added during the press conference that the inflation overrun stemming from tariffs on imported goods is likely to be the result of a one-time price increase barring the imposition of new tariffs that could add to the price pressures facing consumers.

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"The expectation is that we will see the effects of tariffs flowing through goods prices peaking and then starting to come down, assuming there are no new major tariff increases that are begun," Powell told FOX Business' Edward Lawrence. "That's what we expect to see over the course of this year."