Key Points

  • U.S. consumer spending rose only slightly in February, reflecting households' increasingly pessimistic inflation expectations before energy prices surged due to the Iran war.
  • Data released Thursday by the U.S. Bureau of Economic Analysis (BEA) showed that real personal consumption expenditures (Real PCE), adjusted for inflation, rose only 0.1% in February after being flat in January. Since March 2025, real PCE has generally trended downward, with inflation persistently above the Federal Reserve's 2% target, creating headwinds for consumption. During the same period, personal income fell 0.1%.
  • Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, noted in a report: "High oil prices, weak consumer confidence, sluggish underlying income growth, and an already low household savings rate—these factors combined all suggest that consumer spending will remain very weak in the second quarter."

In-Depth Analysis

Economists in both the private and public sectors have recently expressed concerns about the impact of surging energy prices. Since the outbreak of the Iran war on February 28, energy prices have risen sharply, which could further push up inflation and dampen household spending and overall economic growth.

St. Louis Fed President Alberto Musalem said in a speech: "Consumer spending in the first two months of 2026 was weak." He added on April 1: "Uncertainty stemming from the Middle East conflict and pending tariff policies could weigh on consumer and business spending in the first half of the year. Additionally, rising prices for fuel, aluminum, and fertilizer could have similar effects, as these commodities are particularly sensitive to regional supply chain disruptions."

The Federal Reserve's preferred inflation gauge—the personal consumption expenditures (PCE) price index excluding volatile food and energy prices—rose 0.4% month-over-month in February, matching January's increase. On a year-over-year basis, core PCE rose 3%.

Federal Reserve Vice Chair Philip Jefferson said Tuesday: "Core inflation has shown little progress over the past year." He further noted that rising energy prices in March and April "have made my inflation forecast more complicated," and emphasized that "many product costs rose sharply during the pandemic, and Americans still feel the pressure of these high prices when shopping and paying bills." He also mentioned: "The recent jump in gasoline prices has undoubtedly intensified public discontent."

According to data from the American Automobile Association (AAA), since U.S. and Israeli warplanes launched airstrikes on Iran, the national average gasoline price has surged from $2.98 per gallon to $4.16 as of Thursday, an increase of about 39%.

A survey by the New York Fed showed that households expect rising gasoline and other commodity prices to push up overall inflation. The survey, released Tuesday, showed that consumers' one-year-ahead inflation expectations rose to 3.4% in March, with households expecting gasoline prices to rise 9.4% over the next 12 months.

Meanwhile, consumers do not expect wage growth to alleviate price pressures. The New York Fed said the median expectation for wage growth among consumers fell 0.1 percentage point last month to 2.4%, at the lower end of the range since May 2021.