Tariffs are looming, inflation is still sticky and US consumers are bracing themselves for the impact.
That’s according to data released Friday from the Commerce Department: Americans socked away money into savings, pulled back on discretionary purchases, and, when accounting for inflation, increased their spending ever so slightly after taking a breather in a frigid and post-holiday January.
At the same time, inflation data showed minimal progress on the easing of price hikes.
But the most comprehensive economic data to date on how prices are changing and how consumers are earning, spending and saving doesn’t fully account for the elephant in the room: President Donald Trump’s aggressive trade policy.
Recently imposed tariffs on auto imports and a slew of other levies waiting in the wings stand to ding consumer spending — America’s economic engine — and drive prices higher, economists warn.
“There is no other conclusion possible other than the Trump 2.0 economic policies are frightening consumers as much as they do corporations,” Chris Rupkey, chief economist at FwdBonds wrote in a note on Friday. “The economy is going to stall out if not something worse if Washington policymakers are not careful.”
The Personal Consumption Expenditures price index rose 2.5% in February from the year before, holding steady with what was seen in January, according to Commerce Department data released Friday. On a monthly basis, prices rose 0.3%, unchanged from January.
Economists expected that falling energy prices and stabilizing food prices would help keep the disinflationary trend at hand, and that was indeed the case: Energy prices fell 1.1% for the month while food prices eased just slightly to 1.5% from 1.6%.
Forecasts called for the PCE price index to be unchanged from January’s preliminary 2.5% rate.
However, one critical barometer — the core PCE index, which serves as a gauge of underlying inflation — came in slightly hotter than economists expected.
Excluding food and energy prices, which tend to be more volatile, the closely watched core PCE price index rose 0.4% for the month and 2.8% from a year before, accelerating from 2.7% in January.
Friday’s core PCE data “suggests that inflation still remains sticky, despite signs of softening in recent months,” Robert Ruggirello, chief investment officer, Brave Eagle Wealth Management, wrote in a note. “While tariffs are likely to add a one-off shock to inflation, it remains very unclear on how long the tariffs will last, as it’s very possible that a future trade deal leads to reduced or even no tariffs.”
Income growth bolstering household finances
Excluding the effects of inflation, consumer spending rebounded in February, rising 0.4% for the month. In January, spending was weaker than initially reported and fell by 0.3%.
Where consumers put those dollars was especially telling: They shelled out more for goods while pulling back sharply on services spending, such as eating out and traveling.
“Heightened uncertainty around the economic outlook, fears of accelerating inflation, and the declines in the equity market are depressing consumer confidence and now we see signs that the ‘soft’ survey data are starting to weigh on the ‘hard’ economic data,” Kathy Bostjancic, chief economist of Nationwide, wrote Friday. “It was particularly telling that consumers pulled back on discretionary service expenditures, recording the first decline since January 2022.”
However, when adjusting for inflation, spending in February was up a mere 0.1%.
Friday’s report, however, did provide a silver lining for household finances: Incomes climbed by 0.8% for the month and and disposable income (after taxes) was up 0.9% and 0.5% after adjusting for inflation. Consumers opted to put a good chunk in their piggy banks: The personal saving rate increased to 4.6% from a revised 4.3% rate in January.
“Obviously, consumers remain jittery given spending remains subdued and savings high, but as long as incomes keep growing there’s money to spend, which will support the economy and help Americans deal with persistent inflation,” Robert Frick, corporate economist at Navy Federal Credit Union, wrote Friday.
“While inflation ticked up, we have yet to know and feel the full effect of tariffs, especially on autos, and how much they will raise prices,” he added.
This story is developing and will be updated.
