Stubbornly high inflation paired with another war in the Middle East could spell trouble for the U.S. economy.
Personal income rose 0.4% in January, according to the Bureau of Economic Analysis, but inflation reduced that gain to just 0.15% in real terms. The PCE price index — the Fed’s preferred inflation gauge — increased 0.3% during the month, leaving year-over-year inflation at 2.8%, well above the Fed’s 2% target and a consistent drag on Americans’ income gains.
While this report reflects data gathered before the Iran war began, it shows a stubborn inflation rate which is sure to increase given that household expenses like gasoline have jumped since the U.S. bombing campaign started at the end of last month. For everyday Americans, this means lower purchasing power and higher economic anxiety.
“Today’s report makes one thing unmistakably clear: core inflation is heating up again, and the U.S. consumer is losing steam,” said Olu Sonola, head of US economics at Fitch Ratings. “The recent oil price surge is not just a headline risk — it’s a direct squeeze on household budgets, and if it persists, it will further erode spending and drag on growth.”
Friday’s report also saw a significant decline in government assistance program payments. These benefits — a category which includes the Supplemental Nutrition Assistance Program and Affordable Care Act — dropped 2.4% from December, the largest month over month decline since November 2024. The drop reflects public assistance program cuts and eligibility changes enacted under President Trump’s Big Beautiful Bill that are now beginning to show up in the economic data.
The reduction in public assistance payments for basic necessities such as food could add to a growing affordability crisis and an ever widening gap between the economic fortunes of higher income and lower income earners, the latter of which are much more susceptible to high inflation.
Cheryl Uzamere, 66, relies heavily on her monthly $298 SNAP payment to feed herself. Last October, SNAP benefit amounts changed after the United States Department of Agriculture implemented a 2.8% cost of living adjustment, raising her monthly allotment by $6. If the Iran war drags on and raises grocery prices even higher, she will have to wait until October of this year for her monthly allowance to reflect those inflationary increases.
“I buy what’s on sale,” said Uzamere, who acknowledged she can’t afford to eat out and must find ways to stretch her monthly SNAP allowance. “Eating out — that’s entertainment. It’s something I don’t really do.”
Bob Stein, a financial analyst at First Trust, believes the private sector is keeping personal income growth out of the grip of high inflation.
“The private sector growth in wages and salaries will be important for the long run, and that was up 0.6%.” Stein said.
Still, inflation remains the clearest signal on where the economy is headed.
“Inflation is clearly above the Fed’s 2% target and doesn’t appear to be coming down anytime soon,” said Stein.
Until inflation begins to ease meaningfully, even strong wage growth may struggle to translate into lasting gains in Americans’ purchasing power.
