Shoppers walk through the Fashion Centre at Pentagon City, a shopping mall in Arlington, Va., on Feb. 2, 2024.SAUL LOEB/Getty Images
U.S. consumer spending rebounded less than expected in February while a measure of underlying prices increased by the most in 13 months, stoking fears the economy was facing a period of tepid growth and high inflation amid an escalation in trade tensions.
Those concerns were reinforced by a survey from the University of Michigan on Friday showing consumers’ 12-month inflation expectations soared to the highest level in nearly 2½ years in March. Even more worrisome, consumers anticipated inflation would remain elevated in the years beyond.
Economists say President Donald Trump’s protectionist trade agenda, marked by a rush of tariff action announcements since taking office in January, will boost prices of imported goods and drive inflation higher in the coming months.
Federal Reserve chair Jerome Powell acknowledged last week that inflation had started to rise “partly in response to tariffs,” adding that “there may be a delay in further progress over the course of this year.”
While Mr. Powell played down the deteriorating inflation expectations, economists said hot underlying price pressures could deter the U.S. central bank from resuming cutting interest rates in June as anticipated by financial markets.
“Today’s data is only inflaming stagflation fears,” said James Knightley, chief international economist at ING. “We are moving in the wrong direction and the concern is that tariffs threaten higher prices, which mean the inflation prints are going to remain hot. This will constrain the Fed’s ability to deliver further interest-rate cuts.”
Consumer spending, which accounts for more than two-thirds of economic activity, climbed 0.4 per cent after a downwardly revised 0.3-per-cent decline in January, the Commerce Department’s Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending gaining 0.5 per cent after a previously reported 0.2-per-cent fall in January.
Spending was lifted by a 1.4-per-cent surge in outlays on long-lasting manufactured goods such as motor vehicles and parts, recreational goods and vehicles as well as furniture and other durable household equipment. Spending on non-durable goods such as food and beverages also rose.
But consumers are pulling back on discretionary spending. Outlays on services edged up 0.2 per cent, with receipts at restaurants, hotels and motels dropping 15.0 per cent.
“Consumers are clearly becoming more tactical and cautious in their spending as they try to navigate this uncertain economic and inflationary environment,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.
Spending at non-profit institutions plunged 15.8 per cent amid federal funding cuts as the Trump administration embarks on an unprecedented campaign to sharply downsize the government.
Mr. Trump this week unveiled a 25-per-cent levy on imported cars and light trucks starting next week. Economists say the size and manner in which the tariffs are being handled were detrimental to economic growth.
They have also criticized the often disorderly firings of thousands of federal workers by tech billionaire Elon Musk’s Department of Government Efficiency, or DOGE. Many workers have been ordered reinstated by courts.
U.S. stocks traded lower. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
With the United States’ trade partners expected to retaliate through duties of their own, the risks of stagflation or worse, a recession, have increased.
The well-telegraphed tariffs have sharply widened the trade deficit as businesses rushed to secure imports. Mr. Trump, who sees tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining U.S. industrial base, is planning to unveil a wave of reciprocal tariffs next week.
Economists, however, argue that the duties will be inflationary, a sentiment shared by consumers.
Consumers’ one-year inflation expectations jumped to 5.0 per cent in March, the highest level since November, 2022, the University of Michigan survey showed. That compared with 4.3 per cent last month.
Over the next five years, they saw inflation running at 4.1 per cent, the highest reading since February, 1993, and up from 3.5 per cent in February. “Inflation expectations are the transmission mechanism in which a one-time hit to the price level from tariffs turn into a general increase across the price level or inflation,” said Joseph Brusuelas, chief economist at RSM US.
“A rational fiscal policy maker would look at the tone and tenor of the hard and soft data and conclude it’s time to start cutting trade deals to limit the damage to the real economy.”
The BEA report showed the Personal Consumption Expenditures (PCE) price index increased 0.3 per cent in February after advancing by the same unrevised margin in January and in line with economists’ expectations.
There were increases in the prices of recreational goods and vehicles, and other durable goods as well as clothing and footwear. Services prices rose solidly, driven by higher costs for housing, recreation and finance.
In the 12 months through February, PCE prices increased 2.5 per cent, matching January’s rise.
Stripping out the volatile food and energy components, the PCE price index rose 0.4 per cent in February. That was the biggest gain in the so-called core inflation since January, 2024, and followed an unrevised 0.3-per-cent advance in January.
In the 12 months through February, core inflation increased 2.8 per cent after rising 2.7 per cent in January.
The Fed tracks the PCE price measures for its 2-per-cent inflation target. It last week left its benchmark overnight interest rate unchanged in the 4.25-per-cent to 4.50-per-cent range.
Following the auto tariffs, J.P. Morgan raised its core PCE inflation estimate this year to 3.1 per cent from 2.8 per cent.
“We see much of this increase concentrated in the second quarter,” said Michael Feroli, J.P. Morgan’s chief U.S. economist. “The resulting squeeze on consumer real purchasing power will further weigh on real consumer spending.”
Consumer spending adjusted for inflation edged up 0.1 per cent after declining 0.6 per cent in January. That suggested consumer spending and economic growth could stall this quarter.
Goldman Sachs cut its gross domestic product estimate to a 0.6-per-cent annualized rate from a 1.0-per-cent pace. The Atlanta Fed is forecasting GDP contracting at a 2.8-per-cent rate. The economy grew at a 2.4-per-cent pace in the October-December quarter.
“This report increases the chances that first-quarter real GDP growth will print with a negative sign,” said Conrad DeQuadros, senior economic advisor at Brean Capital.