Inflation holds steady, but uncertainty leaves American consumers in sour mood

(TNND) — The Federal Reserve's favored measure of inflation held steady last month, the Commerce Department reported Friday.

But a fresh update on consumer sentiment showed a worsening economic mood among Americans.

"I think 'uncertainty' is a word you should use in bright lights," said Colorado State University economist Stephan Weiler.

The personal consumption expenditures, or PCE, price index for February increased at an annual rate of 2.5%, essentially the same as the last few months.

The PCE dipped as low as 2.1% in September before rising back into the mid-2% territory.

So-called core PCE, which strips away volatile food and energy prices, was 2.8% last month. Core PCE has been steady in recent months.

The Federal Reserve's target rate for inflation is 2%.

For context, the PCE inflation gauge peaked at just over 7% three years ago when prices were increasing the fastest.

Another highly cited measure of inflation, the consumer price index, ticked down to 2.8% in February after hitting 3% in January. The CPI is a bit higher than it was in the fall.

Meanwhile, the University of Michigan released its final March consumer sentiment index report.

Consumer sentiment fell for the third straight month, tumbling 12% from February.

Weiler said the fall in the University of Michigan’s consumer expectations index was even more concerning than the drop in the overall consumer sentiment index.

The expectations index was down 18% from a month earlier and down 32% from a year earlier.

“That figure there is the one to watch,” Weiler said of consumer expectations for how the economy will unfold in the coming months.

Is a recession everybody's big fear?

Weiler said it’s actually something worse: stagflation.

That’s when we have a recession – a decline in economic growth and rising joblessness – paired with rising consumer prices.

“Given the amount of tumult in the economic sphere right now, I think that the chances of a recession have gone up significantly,” Weiler said.

President Donald Trump himself wouldn’t rule out a recession when asked about the possibility during an interview earlier this month, Weiler noted.

Consumers account for 70% of the gross domestic product, or GDP, which is the general gauge of economic growth.

Business investment, government spending and net exports also factor into GDP.

If there's less government spending, which could happen with Trump’s efforts to prune the bureaucracy, then that could offer a headwind to economic growth, Weiler said.

And Trump’s tariffs could increase consumer prices while throttling business and consumer spending, but there remains a lot of uncertainty surrounding tariffs.

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The University of Michigan’s survey of American consumers found year-ahead inflation expectations jumped to their highest reading since November 2022.

And the Commerce Department’s report showed a second consecutive month of small price increases on goods as a portion of PCE after the price of goods had been falling for essentially all of 2024.

Weiler said it’s possible, though uncertain, that tariff expectations are driving the sudden increase in the price of goods.

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Services are the other side of the inflation coin.

The Commerce Department said the PCE index increased about $88 billion last month – $56.3 billion in spending for goods and $31.5 billion in spending for services.

Rising consumer costs for services is mostly about the cost of labor. As wages increase, services cost more for consumers.

Consumer costs for services increased 3.5% last month, consistent with the increases in recent months.

If the jobs market slows amid the souring economic mood, then that could ease upward pressures on wages.

And that could help cool inflation.

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But if tariffs create upward pressure on the cost of goods, then that could cancel out some of the gains against inflation on the services side.

Weiler said a single tariff has only a one-time boost on inflation.

“But the problem is ... it's never just one tariff,” he said. “It becomes a lot of tariffs. And then you get retaliation.”

Goods in general would start getting marked up, he said.

“In this sort of tariff war, it means that people are trading off raising prices constantly,” Weiler said. “And that can start feeding into inflation.”

Weiler said the government’s report Friday included another clue that Americans are feeling more cautious about the economy.

The personal savings rate bottomed out at about 3% in December and has been steadily rising, now at over 4.5%.

Americans are saving more and spending less, Weiler said.

“That can be an indirect indicator that consumers are beginning to feel a little concerned about what's coming up,” he said.