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The Federal Reserve’s preferred inflation gauge rose more than forecast in February, while consumer gloom deepened, underscoring concerns that the US is on course for a bout of stagflation and knocking Wall Street stocks.
The core reading of the personal consumption expenditure (PCE) price index, was up 2.8 per cent in February from a year ago, according to Bureau of Economic Analysis data released on Friday.
Economists expected the index, which strips out food and energy, to be up 2.7 per cent, unchanged from January’s upwardly revised rate. The main PCE index rose 2.5 per cent last month, unchanged from January.
Consumer spending, meanwhile, rose 0.4 per cent last month, a reversal from January’s 0.3 per cent decline, but not as strong as the 0.5 per cent increase economists forecast, the BEA report showed.
The data comes at a time when investors and economists are concerned that Donald Trump’s sweeping tariffs will slow economic growth and increase inflation — stoking stagflation in the world’s largest economy.
US stocks slid on Friday, with the S&P 500 dropping 1.4 per cent and the tech-focused Nasdaq Composite off 2 per cent. US government debt also rallied, pushing the 10-year Treasury yield down 0.09 percentage points to 4.28 per cent.
A survey by the University of Michigan released on Friday added to investor worries over the economy. It showed that consumer sentiment plunged in March as Americans worried about their job prospects, inflation and income levels. Households also forecast inflation over the long term of 4.1 per cent, the highest since 1993.
“This month’s decline [in sentiment] reflects a clear consensus across all demographic and political affiliations,” the University of Michigan said.
It added: “Republicans joined independents and Democrats in expressing worsening expectations since February for their personal finances, business conditions, unemployment and inflation.”
Pantheon Macroeconomics’ senior US economist Oliver Allen said the consumer spending data was “disappointing” and that an “underlying slowdown in demand growth also seems to be under way”.
The Fed earlier this month boosted its forecast for inflation and cut its growth outlook. Fed chair Jay Powell said at the time that the US economy was still in good shape and the central bank did “not need to be in a hurry” to cut interest rates after reducing them by 1 percentage point last year.
However, the president of the Chicago branch of the Fed, Austan Goolsbee, told the Financial Times this week that the central bank was no longer on the “golden path” of 2023 and 2024 when inflation appeared to be returning to the 2 per cent target without derailing economic growth or lifting unemployment.
“We are moving in the wrong direction and the concern is that tariffs threaten higher prices, which mean the inflation prints are going to remain hot. This will constrain the Fed’s ability to deliver further interest rate cuts,” said ING chief international economist James Knightley.
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