At a Glance

  • February inflation accelerated, while consumer spending rose less than expected, raising market concerns that the U.S. economy is sliding into a 'stagflation' phase of rising prices and slowing growth.
  • Data released by the U.S. Bureau of Economic Analysis last Friday showed that consumer spending rose only 0.1% month-over-month in February; excluding volatile food and energy prices, the personal consumption expenditures (PCE) price index rose 2.6% year-over-year in January,accelerating to 2.8%. The Fed's inflation target is 2%.
  • "The latest economic data indicate that signs of stagflation in the U.S. are intensifying," said Mohamed El-Erian, chief economic adviser at Allianz, on platform Xin a post. He cited a University of Michigan survey released last Friday, noting that consumers' long-run inflation expectations have jumped to 4.1%, a 32-year high.

In-Depth Analysis

Fed officials and private-sector economists have repeatedly warned of inflation risks and downgraded economic growth forecasts for this year, cautioning about the potential impact of the Trump administration's tariffs, mass deportations of immigrants, and other policy changes.

In forecasts released on March 19, Fed officialscut their 2025 economic growth estimate to 1.7% from 2.1% in Decemberand noted that 'uncertainty around the economic outlook has increased.'

After the economic data release last Friday, the Atlanta Fed's forecastshowed first-quarter gross domestic product (GDP) contracting at an annualized rate of 2.8%. The regional Fed had projected a 1.8% contraction on Wednesday.

Consumers' views on the economic outlook have soured markedly this year, and consumer spending accounts for nearly 70% of U.S. economic growth.

The University of Michigan's monthly survey showed the consumer sentiment index fell 12% this month, dropping toits lowest level since 2022, with the expectations index down sharply by 18% from February.

This result aligns with a survey released Tuesday by the Conference Board, which showed consumers' expectations for employment, personal income, and business conditions over the next six monthsfell to a 12-year low, reflecting heightened concerns about tariffs and trade policy.

"Amid ongoing economic policy changes, consumers remain worried about potential pain ahead," said Joanne Hsu, director of the University of Michigan survey. One-third of consumers expect the unemployment rate to rise over the next year, the highest proportion since 2009.

"This trend reveals a key vulnerability for consumers, as the strong labor market and income have been major supports for consumer spending in recent years," Hsu said.

She noted that one-year-ahead inflation expectations jumped to 5% this month from 4.3% in February, the highest reading since November 2022, and rose by at least half a percentage point for the third consecutive month.

Since the March 18-19 meeting, Fed officials have repeatedly warned of the risk that tariffs could intensify price pressures.

"I would not casually assume that the impact of tariffs on inflation is entirely transitory," St. Louis Fed President Alberto Musalem said in aspeech on Wednesday. "If medium- or long-term inflation expectations begin to rise, I would also be concerned."

Boston Fed President Susan Collins, when discussing the potential impact of import tariffs on inflation,was more direct。

"It seems inevitable that tariffs will push inflation higher in the near term," Collins said Thursday.

"My baseline expectation is that this could be short-lived, followed by continued disinflation, but the timing may be further out than I previously expected," she said. "But there are risks around that expectation, depending on how things evolve, and inflation could be more persistent and larger."

This month, Fed officials echoed Chair Jerome Powell's repeated point that the unusually murky outlook calls for a cautious approach to monetary policy.

"A thick fog has descended," Richmond Fed President Tom Barkin said in aspeech on Wednesdayon Thursday. "This is not the usual 'forecasting is hard' fog—it's the 'zero visibility, pull over and turn on your hazard lights' fog."

"This is exactly what businesses seem to be experiencing," Barkin said. "Even those who believe the sun is still behind the fog are not willing to take on much risk today."