Consumer Spending Inches up, Reflecting Gloomy Inflation Sentiments

Why It Matters

The modest spending gain masks underlying weakness that could curb Q2 growth and force the Federal Reserve to maintain a tighter monetary stance.

Key Takeaways

• Real PCE grew 0.1% in February after January stagnation
• Core PCE rose 0.4% month‑over‑month, 3% year‑over‑year
• Gasoline prices jumped 39% to $4.16 per gallon since conflict
• Consumer inflation expectations rose to 3.4% for the next year
• Wage growth expectations fell to 2.4%, lowest since May 2021

Pulse Analysis

The latest personal consumption expenditures data reveal a fragile rebound in consumer outlays. While the 0.1% rise in real PCE suggests that households are still willing to spend, the broader macro backdrop remains hostile. Core PCE, the Fed’s preferred inflation gauge, climbed 0.4% month‑over‑month and is now 3% higher than a year ago, underscoring persistent price pressures that sit above the central bank’s 2% target. This inflation backdrop limits discretionary spending and keeps real income growth under strain.

A sharp spike in energy costs is the most visible driver of the current inflation surge. Since the onset of the Iran‑Israel conflict, gasoline prices have leapt from $2.98 to $4.16 per gallon, a 39% increase that directly hits consumers’ budgets. The ripple effect extends to other commodities such as aluminum and fertilizer, which feed into food and household goods prices. With the New York Fed reporting that households now expect a 9.4% rise in gas prices over the next year, inflation expectations have risen to 3.4%, eroding purchasing power and dampening confidence.

Looking ahead, the convergence of low wage growth expectations—now at 2.4%, the weakest since 2021—and declining consumer confidence signals a cautious outlook for the second quarter. Policymakers face a dilemma: tightening monetary policy further could suppress inflation but also risk slowing the already tepid economy. Analysts anticipate that unless energy prices stabilize and real incomes recover, consumer spending will remain soft, potentially prompting the Fed to keep rates elevated longer than markets expect. This environment creates both challenges and opportunities for businesses that can adapt pricing strategies and focus on value‑oriented offerings.