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Key Takeaways

• Core inflation rose faster than expected in February, according to Personal Consumption Expenditures, the Federal Reserve's favorite inflation measure.
  

• Coming in at 2.8% over the past year, core inflation is still higher than the Fed's goal of a 2% annual rate and is headed in the wrong direction.
  

• The data was collected before President Donald Trump shook up the economic outlook in March by announcing a series of tariffs against trading partners, which economists say could push up prices and reignite inflation.
  

Consumer prices rose faster than expected in February, according to a new report on inflation and consumer spending.

Prices excluding food and energy rose 2.8% over the last 12 months in February, as measured by "core" Personal Consumption Expenditures, the Bureau of Economic Analysis said Friday. That was up from 2.7% in January and slightly more than forecasters had expected, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. Including food and energy, prices rose 2.5%, the same as in January and in line with expectations.

The elevated rate showed inflation is still hammering the economy and household budgets, even before President Donald Trump's tariff campaign added even more upward pressure. Many economists have voiced concerns that Trump's numerous tariffs announced in recent weeks could reignite inflation by raising prices, especially because consumer expectations of future inflation have shot up in recent weeks, according to surveys.

"Core PCE was higher than expected, and it might be hard to go lower from here because incomes are high and tariffs are coming," David Russell, global head of market strategy at TradeStation, wrote in a commentary. "We might be looking at the last remnants of the old economy before inflation expectations are permanently reset upward."

U.S. consumers also spent less than expected amid the higher prices. Spending rose 0.4% over the month from January, rebounding from a 0.3% drop but below the median forecast for a 0.5% increase.

In a bright spot for consumers, personal income rose 0.8% over the month, beating expectations for a 0.4% increase.

Is the Economy Moving Toward Stagflation?

The report showed a different inflation trend than another measure, the Consumer Price Index, released earlier this month, which showed inflation running slower than expected. The two inflation gauges measure prices differently and sometimes diverge. Policymakers at the Federal Reserve pay closer attention to PCE inflation, with "core" PCE serving as the benchmark for the Fed's target of a 2% annual inflation rate.

Overall, however, disappointing spending combined with higher inflation highlighted the risk that economic growth and the job market could slow while inflation is high, a financially painful state of affairs called "stagflation."

An episode of stagflation would put officials at the Federal Reserve in a bind because the central bank can use its monetary policy to slow the economy to push down inflation or to boost the economy and help the job market, but not both at the same time. Fed officials have held the fed funds rate steady since January, waiting to see how Trump's economic policies will affect the outlook. The fed funds rate influences borrowing costs on all kinds of loans, nudging the economy one way or the other by encouraging or discouraging spending.

"The acceleration in core PCE inflation and the softness in consumer spending is an unfavorable mix of economic data,” Kathy Bostjancic, chief economist at Nationwide, wrote in a commentary.“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.”

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