U.S. consumers are spending less compared to the beginning of the year, while inflation eases, a sign of relief for the monetary policymakers trying to cool off the economy that started the year strong.

Consumer spending increased by 0.2% in February, a substantially slower rate compared to January’s 2% increase, according to Friday’s report by the Commerce Department. And the Fed’s preferred inflation metric, or personal-consumption expenditures price index showed an encouraging annual increase of 5% in February, down from 5.3% in January. On a month-to-month basis, PCE price index of 0.3% also slowed compared to 0.6% in January. 

The data serves as evidence that inflation is starting to decelerate after a worrying increase in the beginning of the year, which means the economy is cooling off. But there’s still uncertainty. The data showing consumer spending and PCE index, taken together with other economic indicators, like the labor market, will decide if the Fed continues increasing interest rates to make borrowing more expensive for households and businesses.

“We’re just finding that the economy is less interest rate sensitive than we thought it would be,” said Dr. Michael R Englund, Chief Economist at Action Economics LLC. “We haven’t seen rate increases this sharp for a long time, for many decades. Many people assumed it’d be a shock to the consumer, but obviously the economy’s been pretty resilient to these rate hikes and apparently the Fed’s going to have to do more if it wants to slow growth.”

Restricting consumer spending, driving force of the U.S. economy, has been a priority for the Fed in the past year as it’s been increasing its rate at a remarkable pace to reduce its 6% inflation to the desirable 2% target. Last week, The Fed chair Jerome Powell suggested if the banking turmoil limits lending and slows the economy, the Fed might not need to interfere as much as it has been.  But while spending has slowed, it remains surprisingly robust.

However many economists have become more confident about the recession because of the sudden slowdown in lending following the banking turmoil, that would slow the economy.

“At this point it seems like a recession is more likely than not in 2023,” said William Adams, Chief Economist at Comerica Bank. “The rapid increases in interest rates over the last year are a restraint on the parts of the economy that rely on credit, so the housing industry, commercial real estate, and to an extent business capital spending on equipment and manufacturing are all going to see headwinds in 2023.”

Overall the spending boom that we saw in 2023 seems to have slowed, according to other economic indicators as well, such as retail sales. Demand for goods and services has increased by 0.3%, which is significantly lower than 3.2% in January, The commerce department showed in its retail sales report earlier this month.

Consumers' spending trends shifted from purchasing motor vehicles and spending on food serviced and accommodations in January. In February U.S. households spent on housing, utilities and energy goods, but they have saved more than in prior months. 

Meanwhile U.S. households’ personal income has also increased, mainly reflecting growth in salaries and wages. And Friday’s report showed an increased disposable personal income increase, which shows households’ purchasing power. 

“What we hadn't expected is how incredibly strong the disposable income data would be,” Englund said. “It’s clear now. If you look at the consumer confidence surveys, they've actually had a slight up-tilt since the middle of last year, even though we thought the economy was going to be slow.”

The labor market has been surprisingly strong so far in 2023 with decades-low unemployment rate of 3.4% in January,  and continued wage growth. Tight job market is beginning to cool off but economists are still expecting the numbers next week to be strong by normal standards.

And even though the economy seems to be gradually slowing, the strong job market and inflation are still keeping the prices high and consumers are feeling it. 

Anthony, a 57-year-old engineer, who has always been frugal with his spending, says the most pronounced effect the inflation had on his spending habits is when he goes into the supermarket to shop for groceries. 

“I had to switch around some of the purchases,” he said, giving an instance that earlier he was able to find two 8 ounce cheeses for four dollars, as opposed to having to pay five dollars now, explaining that it’s just a dollar difference, but it’s fourth of the original price.