Inflation hot, spending not

Do you want the bad news or…the other bad news first?

Even while shoppers are putting away their wallets for now, our old pesky friend inflation still hasn’t gotten the hint that the party is over.

The Fed’s preferred inflation gauge, released this morning, rose 0.4% last month from January, the biggest jump in a year and more than expected.

• Core inflation, which excludes volatile food and energy prices, was up 2.8% year over year in February, higher than the 2.7% analysts expected and above the 2.6% reading in January.
• Meanwhile, inflation-adjusted consumer spending only rose 0.1% last month as Americans cut back on spending on services, such as dining out and staying at hotels.

One silver lining? US households are still putting money away: Inflation-adjusted disposable income climbed 0.5% in February, and the savings rate rose 4.6% for the month, the highest rate since last summer.

And remember, this is all before President Trump’s “Liberation Day” tariffs kick in next week, which are expected to raise prices on everything from car parts to cocktails.

Keeping the Fed on its toes

Fed Chair Jerome Powell’s tricky soft landing attempt seems to be getting more turbulent with every new economic data point that comes in.

Here’s the central bank’s central challenge: Inflation is already sticky, and will likely be pushed higher by Trump’s tariffs. But at the same time, the labor market is cooling, consumer sentiment is in the dumps, and Americans are seeing recession indicators everywhere from Wall Street bank surveys to the return of business casual in the club.

Today’s inflation and spending numbers support the Fed’s uncomfortable “wait and see” approach to lowering interest rates, though investors are still pricing in a rate cut in June.

Here’s EY Senior Economist Lydia Boussour on the possible path for rate cuts: “We continue to anticipate two 25 basis point (bps) rate cuts in 2025, in June and December. However, a reactionary monetary policy stance means policy direction could rapidly turn more dovish on weaker economic and labor market data, just like it could turn hawkish with hotter inflation and inflation expectations readings.”

Translation: Who really knows?—LB