Americans hoping for some relief on inflation suffered a setback in February, as new data showed underlying price pressures intensifying even before the latest escalation in President Trump’s trade war and consumers pulled back on spending.
The Personal Consumption Expenditures price index, after stripping out volatile food and energy items, climbed 2.8 percent in February from a year earlier, outpacing January’s annual pace, the Commerce Department reported on Friday. On a monthly basis, these “core” prices ticked up another 0.4 percent, higher than the monthly increase in January.
The increase, which was more than what economists had expected, was driven by a rise in prices for everyday items, suggesting Mr. Trump’s tariffs are starting to have a more notable impact. Until a couple of months ago, goods prices were consistently flat or on occasion turned negative, helping to bring inflation down.
Also in January, core services inflation rose 0.36 percent. Overall inflation came in at 2.5 percent, a level that sits well above the Federal Reserve’s 2 percent target and has been more or less in place since November.
Consumer spending for the month rose 0.4 percent, reversing a decline seen in January but falling short of what economists had forecast. Once adjusted for inflation, spending rose only 0.1 percent. Americans also increased how much money they are putting aside, with the personal saving rate rising to 4.6 percent.
“It shows some preliminary signs of stagflationary pressures,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “This reinforces the narrative that growth may be becoming a little bit more sluggish even as inflation is starting to show some signs of perking up before we really get the brunt of the trade disruptions.”
The latest data from the Commerce Department highlights the extent of the challenge the central bank is confronting. Its debate over what to do about interest rates has been complicated by a rapidly escalating trade war, one that has bred extreme uncertainty about the economic outlook.
Josh M. Hirt, senior U.S. economist at Vanguard, said a combination of slower spending and higher savings was a “cautionary sign” and taken together with firmer inflation puts the Fed “in a bind.”
On Wednesday, Mr. Trump announced 25 percent tariffs on cars and car parts imported into the United States and has vowed to unveil another set of tariffs next week.
With the scope and scale of the tariffs not yet clear, and a host of other policies pertaining to immigration, taxes and deregulation still being worked out, the Fed has opted to stand pat until it gets more clarity about what exactly Mr. Trump will enforce and how consumers and businesses will respond.
Last week, the Fed voted to hold rates in a range of 4.25 percent to 4.5 percent, extending a pause that has been in place since January. That followed a series of cuts in late 2024 that lowered borrowing costs by a percentage point.
In new projections released alongside the rate decision, most officials continued to anticipate half a percentage point’s worth of cuts this year, in line with December’s estimates. Still, eight policymakers forecast either no additional cuts or just one, suggesting a widening range of views about the policy path forward.
Overall, most officials are bracing for higher inflation and lower growth this year. By the end of 2025, they expect core inflation to settle around 2.8 percent before falling back to 2.2 percent the next year. Meanwhile, they predict growth will slow to 1.7 percent this year as unemployment rises to 4.4 percent, a backdrop they essentially expect to remain in place through 2027.
Survey data already suggests that consumers are bracing for this outcome as well, although to a much more extreme degree.
Data released by the Conference Board on Tuesday showed that consumer confidence again tumbled this month and now sits at its lowest level since January 2021. A shorter-term gauge tracking income, business and labor market conditions fell to its lowest level in 12 years, surpassing a level that usually signals a future recession.
Consumers have soured on the economic outlook at the same time that they have sharply increased their expectations about inflation, at least according to one measure published by the University of Michigan.
The latest data, released on Friday, showed consumer sentiment plummeted 12 percent in March as expectations about inflation a year from now rose to 5 percent, the highest level since November 2022. Over a five-year period, expectations rose from 3.5 percent in February to 4.1 percent in March, driven by a shift higher in estimates from independents and Republicans.
Jerome H. Powell, the Fed chair, referred to that gauge last week as an “outlier” but said officials would be watching “very, very carefully” for any indication that expectations over a longer time horizon were at risk of spiraling out of control.
Mr. Goldberg, the TD Securities analyst, expects the central bank to keep interest rates at current levels at least for the next couple of meetings, restarting cuts in July and eventually shaving off a percentage point from borrowing costs by the end of the year.
The longer officials wait to make a move, the higher the likelihood they will need to lower rates more aggressively in response to a weakening economy, he warned.
“If they wait for longer, they may miss that Goldilocks moment to actually cut rates and end up having to catch up,” he said.
