WASHINGTON (AP) — Inflation picked up last month and consumers barely raised their spending, signs that the economy was already cooling even before most tariffs were imposed.
Friday’s report from the Commerce Department showed that consumer prices increased 2.5% in February from a year earlier, matching January’s annual pace. Excluding the volatile food and energy categories, core prices rose 2.8% compared with a year ago, higher than January’s figure of 2.7%.
Economists watch core prices because they are typically a better guide of where inflation is headed. The core index has barely changed in the past year. Inflation remains above the Federal Reserve's 2% target, making it difficult for the central bank to cut its key interest rate anytime soon.
The report also showed that consumer spending rebounded last month after falling by the most in four years in January. Yet much of the additional spending reflected price increases, with inflation-adjusted spending barely rising. The weak figure suggests growth is rapidly slowing in the first three months of this year as consumers and businesses turn cautious amid sharp changes in government policies.
“Inflation too hot and spending 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 fall to zero in the first three months of this year, down from 2.4% in last year's fourth quarter.
Inflation remains a top economic concern for most Americans, even as it has fallen sharply from its 2022 peak. Donald Trump rode dissatisfaction with higher prices to the presidency and promised to quickly bring down inflation, but the yearly rate is higher now than in September, when it briefly touched 2.1%.
Consumer spending rose 0.4% in February, though the gain was just 0.1% after adjusting for prices. The mild increase follows a sharp 0.6% drop in January.
The spending and inflation figures steepened a market downturn early Friday. The broad S&P 500 stock market index fell 1.4%. The Dow Jones index fell more than 500 points and the Nasdaq fell as well.
The spending increase was driven by greater purchases of long-lasting goods, such as cars and appliances, which could reflect an effort by shoppers to buy things before tariffs are imposed. They are the kind of purchases that won't likely be repeated in coming months.
Spending on services, including discretionary spending such as at restaurants and hotels, fell.
“The fact that consumers chose to increase outlays on goods that are about to see price increases at the expense of the far more economically important service sector provides insight into the mindset of the consumer,” said Joseph Brusuelas, chief economist at tax and advisory firm RSM.