U.S. consumer spending rebounded in February amid rising prices for goods and services, which could amplify fears that the economy was facing a period of tepid growth and high inflation amid an escalation in trade tensions.
The report from the Commerce Department on Friday showed a measure of underlying price pressures increasing by the most in 13 months. Economists say President Donald Trump's protectionist trade agenda, marked by a rush of tariff action announcements since taking office in January, will boost prices of imported goods and drive inflation higher in the months ahead.
Federal Reserve Chair Jerome Powell acknowledged last week that inflation had started to rise "partly in response to tariffs," adding that "there may be a delay in further progress over the course of this year."
"The data support our view that downside risks to the economy are emerging, but with inflation heating up, the Fed for now will maintain its wait-and-see approach," said Kathy Bostjancic, chief economist at Nationwide.
Consumer spending, which accounts for more than two-thirds of economic activity, climbed 0.4% after a downwardly revised 0.3% decline in January, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending gaining 0.5% after a previously reported 0.2% fall in January.
Spending was lifted by a 1.4% surge in outlays on long-lasting manufactured goods like motor vehicles and parts, recreational goods and vehicles as well as furniture and other durable household equipment.
Spending on nondurable goods such as food and beverages also rose. Outlays on services edged up 0.2%, with consumers cutting back on discretionary spending because of the darkening clouds over the economy. Spending at restaurants, hotels and motels dropped 15.0%.
Outlays at nonprofit institutions plunged 15.8%, likely reflecting federal funding cuts as the Trump administration embarks on an unprecedented campaign to sharply downsize the government. Trump this week unveiled a 25% levy on imported cars and light trucks starting next week.
U.S. stocks opened lower. The dollar slipped against a basket of currencies. U.S. Treasury yields fell slightly.
SURGING INFLATION EXPECTATIONS
Economists say the size and manner in which the tariffs are being handled were detrimental to economic growth. They have also criticized the often disorderly way that tech billionaire Elon Musk's Department of Government Efficiency, or DOGE, has fired thousands of federal workers, many of whom have been ordered reinstated by courts.
Business and consumer sentiment have deteriorated considerably, raising the risks of stagflation or worse, a recession. The United States' trade partners are expected to retaliate through duties of their own.
The well-telegraphed tariffs have sharply widened the trade deficit as businesses rushed to secure imports.
Consumers, also eager to avoid higher prices, front-loaded their spending, much of which took place in December. The ebb in pre-emptive buying as well as unseasonably cold temperatures and snowstorms cooled spending at the start of the year.
Trump, who sees tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining U.S. industrial base, is planning to unveil a wave of reciprocal tariffs next week. Economists, however, argue that the duties will be inflationary in the short run.
Consumers' inflation expectations have skyrocketed. The Personal Consumption Expenditures (PCE) price index increased 0.3% in February after advancing by the same unrevised margin in January and in line with economists' expectations.
There were increases in the prices of goods and services. In the 12 months through February, PCE prices increased 2.5%, matching January's rise.
Stripping out the volatile food and energy components, the PCE price index rose 0.4% in February. That was the biggest gain since January 2024 and followed an unrevised 0.3% advance the prior month.
In the 12 months through February, core inflation increased 2.8% after rising 2.7% in January.
The U.S. central bank tracks the PCE price measures for its 2% inflation target. The Fed last week left its benchmark overnight interest rate unchanged in the 4.25%-4.50% range. Financial markets expect it to resume its easing cycle in June.
When adjusted for inflation, consumer spending edged up 0.1% after declining 0.6% in January. That suggested a sharp slowdown in consumer spending this quarter, and ultimately the economy.
Gross domestic product estimates for the first quarter are around a 1.0% annualized rate. The economy grew at a 2.4% pace in the October-December quarter.
