Inflation Holds at 2.5%—What It Means for Your Wallet

The Personal Consumption Expenditures Index (PCE) increased by 0.3% in February, after a 0.3% increase in January that was not revised. The PCE price index was expected to rise by 0.3%.

The Bureau of Economic Analysis of the Commerce Department said that prices rose 2.5% in the year to February, matching the rise of January.

After a 0.3% increase in January, the PCE index increased 0.4% when excluding volatile components such as food and energy. Core inflation rose 2.8% in the 12 months to December after increasing 2.7% in January.

For its 2% target, the U.S. Central Bank tracks PCE prices. Last week, the Fed left its overnight benchmark interest rate at 4.25% to 4.50% unchanged. The financial markets expect the Fed to continue its easing cycle by June.

U.S. consumers spent more in February. This was likely due to higher prices. This could increase fears of an economy facing a period of tepid economic growth and high inflation as a result of trade tensions.

After a 0.3% drop in January that was revised, consumer spending, which makes up more than two-thirds of the economy, increased by 0.4%.

Economists predicted that consumer spending would rise by 0.5% after January’s reported fall of 0.2%.

Since taking office in January, President Donald Trump has announced a number of tariffs. Trump announced a 25% tax on imports of cars and light trucks that will take effect next week. Economists claim that the size of the tariffs and the way they are handled is detrimental to the economy.

The business and consumer climate has deteriorated significantly, increasing the risk of a recession. Trade partners of the United States are expected to respond with their own duties. As businesses scrambled to import goods, the well-telegraphed tariffs widened trade deficits.

To avoid price increases, consumers also front-loaded their spending. A large portion of it took place in December. Pre-emptive purchases, unseasonably cold temperatures, and snowstorms all contributed to a cooling of spending at the beginning of the year.

Prior to the release of the data, estimates for gross domestic product (GDP) in the first quarter ranged mainly around a rate of 1.0% annually and the odds that a contraction would occur have increased. The economy grew by 2.4% in the quarter between October and December.

Trump, who views tariffs as an instrument to raise revenue in order to offset his tax cuts promised and to revive the long-declining U.S. industry base, plans to announce a wave of reciprocal tariffs by next week. Economists argue, however, that the duties are inflationary in the short term.

Consumers’ expectations of inflation have soared. Federal Reserve Chair Jerome Powell acknowledged that last week, inflation had begun to rise, “partly as a response to tariffs.” He added that there “may be a delay” in further progress during this year.