By AP Economics Writer Christopher Al Gerber
WASHINGTON (AP) – Inflation last month picked up, and consumers barely raised their spending. It shows that the economy was already cooled even before most tariffs were imposed.
A Friday report from the Commerce Department showed consumer prices rose 2.5% in February from the previous year, which coincided with the annual pace of January. Excluding the volatile food and energy categories, core prices rose 2.8% compared to a year ago, higher than January’s 2.7%.
Economists are usually monitoring core prices as they are a better guide to where inflation is headed. The core index has hardly changed over the past year. With inflation exceeding the Federal Reserve’s 2% target, it’s difficult for central banks to cut key interest rates at any time.
The report also showed consumer spending rebounded last month after the biggest decline in January in four years. However, much of the additional spending reflects rising prices, with inflation-adjusted spending barely increasing. The weak numbers suggest that growth has slowed rapidly in the first three months of the year as consumers and businesses become more cautious amid the rapid changes in government policies.
“Inflation is too hot and too cold,” said Stephen Brown, an economist at Capital Economics, a consulting firm, in an email. “The Fed is unlikely to cut interest rates this year.”
Brown estimates that economic growth could reach zero in the first three months of this year, starting from 2.4% in the fourth quarter last year.
Despite the sharp decline since its 2022 peak, inflation remains the highest economic concern for most Americans. Donald Trump has frustrated with the rise in prices to the president and has pledged to speedily lower inflation, but the annual rate is higher than in September, when he temporarily mentioned 2.1%.
Consumer spending rose 0.4% in February, but profits after adjusting prices were only 0.1%. The mild increase follows a sharp 0.6% drop in January.
Expense and inflation figures soaked the market slump early on Friday. The broad S&P 500 stock market index fell 1.4%. The Dow Jones Index fell by more than 500 points, while the Nasdaq fell.
The increase in spending was driven by the purchase of more long-term products, such as cars and appliances. This could reflect shoppers’ efforts to purchase items before customs duties are imposed. They are the kinds of purchases that will not be repeated in the coming months.
Expenditures on services, including discretionary spending, such as restaurants and hotels, have fallen.
“The fact that consumers have chosen to increase spending on products that are trying to see prices rise at the expense of a much more economically important service sector provides insight into consumer thinking.”
Also, on Friday, the University of Michigan released an updated consumer sentiment survey in March. The survey found increased anxiety about inflation and work.
“This month’s decline reflects a clear consensus across all demographics and political affiliations,” said Joan Huss, director of the study. “Republicans have joined Independents and Democrats to express their worsening expectations since February on personal finances, business conditions, unemployment and inflation.”
Trump has slapped 20% tariffs on all Chinese imports and slapped 25% imports on steel and aluminum, and on Wednesday he said he would crash into imported cars with an additional 25% mandatory. Most economists and the Federal Reserve are hoping that inflation will rise this year as a result of tariffs. Fed Chair Jerome Powell last week said the rise in inflation caused by tariffs could be temporary. However, he also added that the outlook is unusually uncertain given the rapid changes in policy from the White House.
Every month, the price in February, the same month as the previous month, rose 0.3%. This is the same as in January, but the core price rose 0.4%, the biggest increase in over a year. That pace of growth will drive inflation well above the Fed’s 2% target for the whole year.
One of the bright spots in the report was a big jump in revenue for the second consecutive month. It rose 0.8% from January to February. Higher incomes with lower spending can boost savings and drive future spending. However, it may also reflect greater attention among consumers.
“Savings have risen, flagged consumer confidence, coinciding with increasing uncertainty about the future and lower future expectations,” said Carl Weinberg, chief economist in radio frequency economics.
Since Trump began rolling out tariffs, consumer and business confidence in the economy has fallen sharply, and the measure of Americans’ outlook for the economy’s future fell on Tuesday to its first decline in 12 years. Many polls show that most of the masses view the economy as fair or poor. A survey by the Pew Research Center last month found that 63% of Americans view inflation as a “very big problem.”
On Thursday, apparel company Lululemon became the latest retailer to warn that lower consumer confidence will damage sales, but Tommy Bahamas, Lily Pulitzer and Johnny say sales will slow down as consumer sentiment begins the year.
Nike previously issued similar warnings and expectations from major retailers such as Target and Walmart, which were suppressed as customers pulled back.
Original issue: March 28, 2025 8:46am EDT
