Consumers are saving more and spending less as Trump's tariffs loom

CNN

30-03-2025

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 weigh on 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.
'[The core PCE price index] has been trading in a band of 2.6% to 2.8% for 10 months — it's just plain moving sideways,' Dan North, senior economist for Allianz Trade North America, said in an interview. 'We're going nowhere. Inflation is really very sticky, not having moved for 10 months, and that puts the [Federal Reserve] in an increasingly awkward spot.'
The Fed last week kept interest rates unchanged, and Chair Jerome Powell indicated that central bankers are waiting for more evidence that inflation is headed toward their 2% target — or that the economy is weakening — before they return to cutting rates.
Powell acknowledged that 'it remains seen' how uncertainty swelling around Trump's aggressive economic agenda affects future spending and investment.
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 — likely reflecting the 'pull forward' of buying products before tariffs hit, economists say — 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.