Inflation showed a notable increase in February, as reported by the Commerce Department, which marks a steady pace since January. Consumer prices saw a 2.5% upward shift compared to the previous year, and core prices, excluding food and energy, rose to 2.8% from last year’s rates, slightly above January’s numbers. Core pricing trends offer valuable insights into future inflation trajectories. Currently, inflation has surpassed the Federal Reserve’s 2% target, complicating any potential plans to reduce interest rates.
Consumer spending did see a rebound last month after experiencing its steepest decline in four years in January. However, most of this rebound mirrors the increase in prices rather than heightened spending, indicating sluggish economic growth as both consumers and businesses become more cautious in light of sudden policy shifts. Stephen Brown, an economist at Capital Economics, commented that inflation is too high for the Fed to consider interest rate cuts this year. According to Brown, economic growth might even drop to zero for the first quarter, down from 2.4% previously recorded.
Despite declining steeply from its 2022 peak, inflation remains a primary concern. Donald Trump capitalized on inflation dissatisfaction during his presidency campaign, but the current yearly inflation rate surpasses the low of September when it touched 2.1%. Consumer spending increased by 0.4% in February, yet adjusted growth for inflation was only 0.1%, following a drop of 0.6% in January. This economic report affected the market, with the S&P 500 dropping by 1.4% and the Dow Jones Index falling by over 500 points.
The rise in consumer spending was largely driven by a surge in durable goods purchases like cars, possibly in anticipation of upcoming tariffs. However, spending on services, particularly in sectors like hospitality and dining, declined. As per Joseph Brusuelas, chief economist at RSM, the consumer mindset is shifting towards purchasing goods likely to face price hikes rather than investing in services, which are more economically significant.
On the same day, the University of Michigan released its March consumer sentiment survey, showing a drop in Americans’ economic outlook. Anxiety over inflation and job security continues to grow across all demographics and political lines. Joanne Hsu, director of the survey, noted Republicans, along with independents and Democrats, showed worsening expectations for their finances and the economy since February.
Amid these concerns, Trump has enacted 20% tariffs on Chinese imports and has threatened 25% duties on imported cars. With these tariffs in place, even economists and the Federal Reserve anticipate a rise in inflation. Fed Chair Jerome Powell recently stated that while some inflation from the tariffs might be temporary, the quick policy changes add unpredictability to the outlook.
Monthly, consumer prices rose by 0.3% from January, with core prices climbing 0.4% – marking the highest increase in over a year. Should such increments continue annually, they would prop up inflation well above the desired 2% set by the Fed. However, a notable increase was seen in incomes, gaining 0.8% from January to February. The rise in income coupled with restrained spending raised the savings rate, potentially funding future spending or signaling increased caution.
Economic confidence has taken a hit since Trump commenced tariff implementations, leading to a significant decline in optimism about the economy, the lowest in 12 years. Pew Research’s recent survey indicated that 63% of Americans still view inflation as a major problem. Additionally, retailers like Lululemon have warned of falling consumer confidence impacting sales, and companies like Tommy Bahama and Nike reported similar trends, while big providers like Target and Walmart adjust expectations due to dwindling customer confidence.