The Federal Reserve's favorite inflation indicator rebounds! The U.S. core PCE in February increased by 2.79% year-on-year, but personal spending saw almost no growth

The inflation indicator most favored by the Federal Reserve continues to rise at a stubborn pace, while personal spending falls short of expectations, indicating that consumers are becoming more cautious amid growing concerns about financial conditions.

On Friday, March 28, the U.S. Department of Commerce released data showing that the Federal Reserve's favorite inflation indicator—the core PCE price index rose 2.79% year-on-year in February, the highest since December 2024, exceeding the expected 2.7% and the previous value of 2.6%; the core PCE price index rose 0.4% month-on-month, surpassing expectations and the previous value of 0.3%, reaching the highest level since January 2024.

The U.S. PCE price index rose 2.5% year-on-year in February, in line with expectations and the previous value; the PCE price index rose 0.3% month-on-month, also in line with expectations and the previous value.

After the release of U.S. PCE and other data, the three major U.S. stock index futures fell further, U.S. Treasury yields remained low, while the dollar rose slightly. Swap traders continue to expect two 25 basis point rate cuts this year, with the first cut anticipated in July.

"Super Core Inflation Indicator" Rebounds Significantly, Service Costs Drive PCE Up

Notably, the "super core inflation indicator" closely monitored by the Federal Reserve—core service costs excluding housing and energy—has rebounded significantly.

Service costs are the main factor driving the PCE economy to re-accelerate, with the contribution of the service sector to core personal consumption expenditures (PCE) growth reaching its highest level in a year, but this is not driven by tariffs.

Consumer Spending Slows, Savings Rate Rises Further

Personal consumption expenditures (PCE) rose 0.4% month-on-month in February, while inflation-adjusted personal consumption expenditures rose slightly by 0.1% month-on-month, following a decline of 0.5% in January, the largest drop in nearly four years, which economists attributed to severe weather.

As prices rise, personal income also increased, growing 0.8% month-on-month, the largest increase since January 2024, exceeding the 0.4% increase in personal spending.

The gap between income and spending has pushed the savings rate to its highest level since June 2024, indicating that consumers are becoming more cautious about their financial situation. Other signs suggest that Americans are facing greater financial pressure, including missed car payments and difficulty in raising emergency funds

Concerns About Stagflation Intensify

The report points out that inflation remains stubbornly high, and the tariffs proposed by President Trump could further exacerbate price pressures. Trump's aggressive trade policies have already undermined confidence among businesses and consumers, and with signs of increasing financial pressure on households, concerns are growing that the economy may fall into stagflation or even recession.

The Federal Reserve's own forecasts also underscore these concerns, as policymakers hinted at slowing economic growth and rising inflation in their latest projections released during last week's policy meeting. Federal Reserve Chairman Jerome Powell downplayed these worries, even reusing the term "transitory" to describe his expectations for tariff-driven inflation, while some of his colleagues expressed more caution.

Before Trump rolls out large-scale tariff measures next week, officials will keep interest rates unchanged until they have a better understanding of Trump's policies—especially the tariffs. The impact of tariffs on prices will largely be reflected through goods. In February, the inflation measure for goods excluding food and energy rose 0.4% for the second consecutive month, marking the largest increase for two consecutive months since 2022, while core service prices also rose at a similar pace.

David Russell, Global Market Strategist at TradeStation, stated:

Core PCE is above expectations, and with high income and tariffs coming, it may be difficult to see a decline going forward.

Before inflation expectations are permanently adjusted upward, we may be witnessing the last remnants of the old economy, which could be contrary to the Goldilocks scenario, where income and inflation are too high, and the Federal Reserve cannot significantly lower interest rates, while the outlook for growth and profit margins is dimming