In February, Americans seeking a break from rising inflation were met with disappointing news as new data unveiled growing underlying price pressures, even before President Trump’s trade war intensified. The Personal Consumption Expenditures price index, which excludes volatile food and energy items, jumped by 2.8% compared to the previous year, surpassing January’s pace. On a monthly basis, these “core” prices edged up by 0.4%, a rate higher than January’s. Both figures slightly exceeded economists’ predictions.
Overall inflation reached 2.5%, surpassing the Federal Reserve’s 2% target and maintaining a higher rate since November. Meanwhile, consumer spending increased by 0.4% in February, recovering from January’s decline but still falling short of economists’ expectations.
This latest report from the Commerce Department underscores the challenges faced by the central bank. The ongoing debate over interest rates becomes even more complicated with the trade war intensifying and casting a cloud of uncertainty over economic predictions. On Wednesday, President Trump imposed 25% tariffs on cars and car parts brought into the U.S. and plans to introduce another round of tariffs soon.
Amid the unclear extent and impact of these tariffs, alongside ongoing policies related to immigration, taxes, and deregulation, the Federal Reserve has chosen to hold off on changes until there’s more clarity on the administration’s policies and their consequences.
Last week, the Federal Reserve decided to keep interest rates steady within the 4.25% to 4.5% range, a pause in place since January. This followed a series of rate cuts that reduced borrowing costs by one percentage point in late 2024. New projections accompanying the rate decision indicate that most officials foresee a half-point rate cut this year, consistent with December’s estimates. However, eight policymakers envision either no further cuts or just one, indicating growing diversity in opinions about future policy directions.
Looking ahead, officials generally anticipate higher inflation and slower growth in the near future. By 2025’s end, they expect core inflation to level at around 2.8% before dropping to 2.2% the following year. They project economic growth to slow to 1.7% this year as unemployment rises to 4.4%, with these conditions likely persisting until 2027.
Surveys show consumers are also preparing for this scenario, albeit more drastically. Data from the Conference Board revealed a decline in consumer confidence to its lowest level since January 2021. Moreover, a shorter-term index tracking income, business, and labor market conditions fell to a 12-year low, hinting at a possible recession.
As consumers grow increasingly pessimistic about the economy, their inflation expectations have surged, according to the University of Michigan’s index. Jerome H. Powell, the Fed chair, described this indicator as an “outlier” but noted officials are monitoring it closely to prevent long-term inflation expectations from spiraling out of control.
