US consumers remained cautious about spending last month as inflation ticked higher
An inflation gauge closely watched by the Federal Reserve remained high last month even before the impact of most tariffs has been felt
WASHINGTON (AP) — Inflation picked up last month and consumers barely raised their spending, signs that the economy was already cooling even before most tariffs were imposed.
Friday’s report from the Commerce Department showed that consumer prices increased 2.5% in February from a year earlier, matching January’s annual pace. Excluding the volatile food and energy categories, core prices rose 2.8% compared with a year ago, higher than January’s figure of 2.7%.
Economists watch core prices because they are typically a better guide of where inflation is headed. The core index has barely changed in the past year. Inflation remains above the Federal Reserve's 2% target, making it difficult for the central bank to cut its key interest rate anytime soon.
The report also showed that consumer spending rebounded last month after falling by the most in four years in January. Yet much of the additional spending reflected price increases, with inflation-adjusted spending barely rising. The weak figure suggests growth is rapidly slowing in the first three months of this year as consumers and businesses turn cautious amid sharp changes in government policies.
“Inflation too hot and spending too cold,” said Stephen Brown, an economist at Capital Economics, a consulting firm, in an email. “The Fed is unlikely to cut interest rates this year.”
Brown estimates that economic growth could fall to zero in the first three months of this year, down from 2.4% in last year's fourth quarter.
Inflation remains a top economic concern for most Americans, even as it has fallen sharply from its 2022 peak. Donald Trump rode dissatisfaction with higher prices to the presidency and promised to quickly bring down inflation, but the yearly rate is higher now than in September, when it briefly touched 2.1%.
Consumer spending rose 0.4% in February, though the gain was just 0.1% after adjusting for prices. The mild increase follows a sharp 0.6% drop in January.
The spending and inflation figures steepened a market downturn early Friday. The broad S&P 500 stock market index fell 1.4%. The Dow Jones index fell more than 500 points and the Nasdaq fell as well.
The spending increase was driven by greater purchases of long-lasting goods, such as cars and appliances, which could reflect an effort by shoppers to buy things before tariffs are imposed. They are the kind of purchases that won't likely be repeated in coming months.
Spending on services, including discretionary spending such as at restaurants and hotels, fell.
“The fact that consumers chose to increase outlays on goods that are about to see price increases at the expense of the far more economically important service sector provides insight into the mindset of the consumer,” said Joseph Brusuelas, chief economist at tax and advisory firm RSM.
Also Friday, the University of Michigan released its updated consumer sentiment survey for March, which showed a sharp drop in Americans' outlook for the economy. The survey also found growing anxiety over inflation and jobs.
“This month’s decline reflects a clear consensus across all demographic and political affiliations,” said Joanne Hsu, director of the survey. “Republicans joined independents and Democrats in expressing worsening expectations since February for their personal finances, business conditions, unemployment, and inflation.”
Trump has slapped 20% tariffs on all Chinese imports, 25% import taxes on steel and aluminum, and on Wednesday said he would hit imported cars with another 25% duty. Most economists, and the Federal Reserve, now expect inflation to tick higher this year as a result of the tariffs. Fed Chair Jerome Powell last week said elevated inflation from the tariffs could be temporary. But he also added the outlook was unusually uncertain given the swift changes in policy from the White House.
On a monthly basis, prices rose 0.3% in February from the previous month, the same as in January, while core prices increased 0.4%, the largest increase in more than a year. Increases at that pace, for a full year, would drive inflation far above the Fed's 2% target.
One bright spot in the report was a big jump in incomes for the second straight month — they rose 0.8% in February from January. Higher income with weaker spending pushed up the savings rate, which can fuel future spending. But it also could reflect greater caution among consumers.
“Savings went up, consistent with reports of flagging consumer confidence, rising uncertainty about the future and reduced expectations for the future,” Carl Weinberg, chief economist at High Frequency Economics, said.
Consumer and business confidence in the economy has fallen sharply since Trump began rolling out tariffs, and a measure of Americans’ outlook for the future of the economy dropped to a 12-year low on Tuesday. Many polls find that most of the public sees the economy as fair or poor. A survey last month by the Pew Research Center found that 63% of Americans still see inflation as a “very big problem.”
Apparel company Lululemon on Thursday became the latest retailer to warn that slumping consumer confidence will hurt sales, while the parent company of Tommy Bahama, Lilly Pulitzer, and Johnny Was stores said that sales slowed to start the year as consumer sentiment darkened.
Nike previously issued a similar warning and expectations from major retailers like Target and Walmart have grown subdued as customers pull back.
