US consumers remained cautious about spending last month as inflation ticked higher

Globe and Mail

28-03-2025

WASHINGTON (AP) — An inflation gauge closely watched by the Federal Reserve remained high last month even before the impact of most tariffs has been felt. Americans' spending increased after a steep fall last month but remained weak, suggesting consumers have turned more cautious this year.
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 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%.
'Inflation too hot and spending too cold,' said Stephen Brown, an economist at Capital Economics, in an email. 'The Fed is unlikely to cut interest rates this year."
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 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.
Spending on services, including discretionary spending such as 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.
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.
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 would hurt sales, sending its shares sharply lower. Nike previously issued a similar warning and expectations from major retailers like Target and Walmart have grown subdued.