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Consumer spending increases 0.4% in February

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PCE price index rises 0.3%; up 2.5% year-on-year

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Core PCE inflation climbs 0.4%; rises 2.8% year-on-year

By Lucia Mutikani

WASHINGTON, March 28 (Reuters) - U.S. consumer spending

rebounded in February amid rising prices for goods and services,

which could amplify fears that the economy was facing a period

of tepid growth and high inflation amid an escalation in trade

tensions.

The report from the Commerce Department on Friday showed a

measure of underlying price pressures increasing by the most in

13 months. Economists say President Donald Trump's protectionist

trade agenda, marked by a rush of tariff action announcements

since taking office in January, will boost prices of imported

goods and drive inflation higher in the months ahead.

Federal Reserve Chair Jerome Powell acknowledged last week

that inflation had started to rise "partly in response to

tariffs," adding that "there may be a delay in further progress

over the course of this year."

"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," said Kathy

Bostjancic, chief economist at Nationwide.

Consumer spending, which accounts for more than two-thirds

of economic activity, climbed 0.4% after a downwardly revised

0.3% decline in January, the Commerce Department's Bureau of

Economic Analysis said. Economists polled by Reuters had

forecast consumer spending gaining 0.5% after a previously

reported 0.2% fall in January.

Spending was lifted by a 1.4% surge in outlays on

long-lasting manufactured goods like motor vehicles and parts,

recreational goods and vehicles as well as furniture and other

durable household equipment.

Spending on nondurable goods such as food and beverages also

rose. Outlays on services edged up 0.2%, with consumers cutting

back on discretionary spending because of the darkening clouds

over the economy. Spending at restaurants, hotels and motels

dropped 15.0%.

Outlays at nonprofit institutions plunged 15.8%, likely

reflecting federal funding cuts as the Trump administration

embarks on an unprecedented campaign to sharply downsize the

government. Trump this week unveiled a 25% levy on imported cars

and light trucks starting next week.

U.S. stocks opened lower. The dollar slipped against a

basket of currencies. U.S. Treasury yields fell slightly.

SURGING INFLATION EXPECTATIONS

Economists say the size and manner in which the tariffs are

being handled were detrimental to economic growth. They have

also criticized the often disorderly way that tech billionaire

Elon Musk's Department of Government Efficiency, or DOGE, has

fired thousands of federal workers, many of whom have been

ordered reinstated by courts.

Business and consumer sentiment have deteriorated

considerably, raising the risks of stagflation or worse, a

recession. The United States' trade partners are expected to

retaliate through duties of their own.

The well-telegraphed tariffs have sharply widened the trade

deficit as businesses rushed to secure imports.

Consumers, also eager to avoid higher prices, front-loaded

their spending, much of which took place in December. The ebb in

pre-emptive buying as well as unseasonably cold temperatures and

snowstorms cooled spending at the start of the year.

Trump, who sees tariffs as a tool to raise revenue to offset

his promised tax cuts and to revive a long-declining U.S.

industrial base, is planning to unveil a wave of reciprocal

tariffs next week. Economists, however, argue that the duties

will be inflationary in the short run.

Consumers' inflation expectations have skyrocketed. The

Personal Consumption Expenditures (PCE) price index increased

0.3% in February after advancing by the same unrevised margin in

January and in line with economists' expectations.

There were increases in the prices of goods and services. In

the 12 months through February, PCE prices increased 2.5%,

matching January's rise.

Stripping out the volatile food and energy components, the

PCE price index rose 0.4% in February. That was the biggest gain

since January 2024 and followed an unrevised 0.3% advance the

prior month.

In the 12 months through February, core inflation increased

2.8% after rising 2.7% in January.

The U.S. central bank tracks the PCE price measures for its

2% inflation target. The Fed last week left its benchmark

overnight interest rate unchanged in the 4.25%-4.50% range.

Financial markets expect it to resume its easing cycle in June.

When adjusted for inflation, consumer spending edged up 0.1%

after declining 0.6% in January. That suggested a sharp slowdown

in consumer spending this quarter, and ultimately the economy.

Gross domestic product estimates for the first quarter are

around a 1.0% annualized rate. The economy grew at a 2.4% pace

in the October-December quarter.