PCE Report shows that the key inflation measure got hotter in February

Takeaways

• Core inflation rose faster than expected in February, according to Personal Consumption Expenditures, the Federal Reserve's favorite inflation measure.
• Coming in at 2.8% over the past year, core inflation is still higher than the Fed's goal of a 2% annual rate and is headed in the wrong direction.
• The data was collected prior to President Donald Trump’s announcement of a series tariffs against trading partner in March, which economists believe could drive up prices and reignite the inflation.

According to a recent report on consumer spending and inflation, consumer prices rose faster in February than expected.

The Bureau of Economic Analysis reported Friday that prices excluding food and fuel rose 2.8% in the last year, as measured by the “core” Personal Consumption Spending. This was up from 2.7% last January and slightly higher than forecasters expected, according a Dow Jones Newswires/The Wall Street Journal survey of economists. Prices rose by 2.5% including food and energy. This is the same as January and in line expectations.

The high rate of inflation showed that the economy and household budgets are still being impacted by inflation, even before President Donald Trump’s tariff campaign increased upward pressure. Many economists expressed concern that Trump’s many tariffs announced in the last few weeks could reignite price inflation, especially since consumer expectations of future prices have shot up, according to surveys.

In a recent commentary, David Russell, global director of market strategy at TradeStation wrote that “core PCE was higher than anticipated, and it may be difficult to go lower from this point because incomes are very high and tariffs will soon be implemented.” We might be seeing the last remnants from the old economy, before inflation expectations permanently reset upward.

U.S. consumer spending was also lower than expected due to higher prices. Spending rose by 0.4% from January to February, rebounding from the 0.3% decline but below the median estimate of a 0.5% gain.

Consumers can take heart from the fact that personal income increased by 0.8% in February, exceeding expectations of a 0.4% rise.

Is the economy heading towards stagflation?

The report revealed a different trend in inflation than the Consumer Price Index (CPI), released earlier this month. That measure showed that inflation is running slower than anticipated. Both inflation gauges are different and can sometimes diverge. The Federal Reserve pays more attention to PCE inflation. “Core” PCE is the benchmark used by the Fed for its 2% annual target.

Overall, however disappointing spending combined higher inflation highlighted the danger that economic growth could slow and the job market could be affected by high inflation, a financially painful condition called “stagflation.”

A stagflation episode would put Federal Reserve officials in a difficult position. The central bank could use its monetary policies to either slow the economy, which would push down inflation, or to boost the economic growth and help the jobs market. But not both. Fed officials have kept the fed funds rate constant since January to see what Trump’s economic policies would do. The Fed Funds Rate influences the borrowing costs of all kinds loans. This can either encourage or discourage spending, which in turn will influence the economy.

Kathy Bostjancic wrote in a comment that the combination of accelerating core PCE inflation with softening consumer spending was not a favorable mix.”The data confirm our view that the economy faces downside risks, but inflation is on the rise, so the Fed will continue to wait and watch for now.”