LIVE MARKETS-TGIF: Hot inflation and a cooling US consumer

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TGIF: HOT INFLATION AND A COOLING U.S. CONSUMER

Investors stumbled toward the weekend with news of still-sticky inflation, weaker than expected consumer spending and further deterioration of the American consumer's outlook.

The Commerce Department's Personal Consumption Expenditures (PCE) report USPCE=ECI, the market's most highly anticipated economic release this week and offered a few surprises.

The PCE price index, Powell & Co's preferred inflation yardstick, is a good place to start.

Prices rose by 0.3% last month and by 2.5% year-on-year, both as expected and both repeats of January.

Stripping away volatile food and energy prices, core PCE gathered some heat, rising by 0.4% from the previous month and 2.8% from February 2024.

Analysts expected monthly and annual readings of 0.3% and 2.7%, respectively.

It was the fourth and final major inflation measure for February. Together they reiterate the difficulty of closing that last gap down to the Fed's average 2% inflation target.

Elsewhere in the report, personal income increased by 0.8%, double the rate analysts expected and marking an acceleration from the prior month's downwardly adjusted 0.7% growth.

Consumer spending rebounded, rising by 0.4% after January's worrying 0.3% decline.

Even so, the increase fell short of the 0.5% growth analysts expected.

"We expect tariffs to slow real spending growth and push up prices in the coming months," says Michael Pearce, deputy chief U.S. economist at Oxford Economics. "While the scale of that impact depends on how large the administration goes on tariffs, our current baseline calls for consumer spending growth to slow to 2% this year, and core inflation to breach back above 3% by mid-year."

We think that combination will keep the Fed on extended pause, especially with inflation expectations showing increasing signs of becoming unanchored," Pearce added.

Digging deeper, in a reversal of the normal trend, consumers spent more on goods and less on services.

Disposable income surged 0.9%, which helped bump the saving rate - or the unspent portion of disposable income - to 4.6% from 4.3%. That was the highest it's been since June 2024.

The saving rate is often viewed as a barometer of consumer anxiety.

Speaking of consumer anxiety, the University of Michigan's (UMich) second and final take on March consumer sentiment USUMSF=ECI showed the mood of the American consumer, responsible for about 70% of U.S. GDP, has grown gloomier than originally reported.

The index was downwardly adjusted to 57.0 from 57.9, touching the lowest level since June 2022.

Survey participants' assessment of present conditions improved nominally, rising 0.5% to 63.8, their near-term expectations deteriorated by 3.0% to 52.6, the most pessimistic level since July 2022.

Notably, the UMich survey, typically bifurcated along party lines, showed some convergence.

"This month’s decline reflects a clear consensus across all demographic and political affiliations," writes Joanne Hsu, UMich's director of Consumer Surveys. "Republicans joined independents and Democrats in expressing worsening expectations since February for their personal finances, business conditions, unemployment, and inflation."

But back to inflation; perhaps the most dour aspect of the report was the heating up on inflation expectations.

Respondents now expect price growth of 5.0% a year from now, nearly double the core year-on-year PCE price index print for February, suggesting consumers' tariff jitters are intensifying.

Longer-term, consumers' five-year inflation expectations rose to 4.1% from 3.9% previously reported.

But consumer worries extend beyond inflation.

"It's not just the fact that the rules of the game have changed that has dimmed the collective consumer mood, but the fact that there’s little clarity about what the rules will be when the dust settles or what the effect will be," says Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors.

(Stephen Culp)

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