US consumer spending rises 0.4% in February, but economy faces inflationary pressures

US consumer spending rebounded in February, rising 0.4% after a revised 0.3% decline in January, according to data from the Commerce Department’s Bureau of Economic Analysis. The increase in spending, which accounts for more than two-thirds of economic activity, was likely driven by higher prices.

Economic Growth Fears Intensify

Despite the rebound, concerns over a period of tepid growth and high inflation persist, especially as trade tensions escalate. Economists had forecast a 0.5% rise in consumer spending after a previously reported 0.2% decline in January. The risk of a slowdown remains as inflationary pressures mount.

Impact of Tariffs on Growth

President Donald Trump has announced several tariff actions since taking office, with the latest being a 25% levy on imported cars and light trucks set to take effect next week. Economists warn that the manner in which these tariffs are being implemented is detrimental to economic growth, raising the risk of a recession as trade partners retaliate with their own duties.

Trade Deficit and Consumer Behavior

Businesses rushed to secure imports before tariffs took effect, widening the trade deficit. Consumers also front-loaded their purchases to avoid higher prices, leading to a spending surge in December. However, spending slowed in early 2024 due to the absence of preemptive buying and unseasonably cold weather.

GDP and Recession Risks

Before the release of the consumer spending data, first-quarter GDP estimates hovered around a 1.0% annualized growth rate, with rising concerns about a possible contraction. The economy grew at a 2.4% pace in the October-December quarter, but further deceleration is expected.

Inflationary Pressures Rise

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, increased 0.3% in February, mirroring January’s gain. On a yearly basis, prices rose 2.5%, maintaining the pace from January. Core inflation, which excludes food and energy, rose 0.4% in February, with a 12-month increase of 2.8%.

Federal Reserve’s Stance

Federal Reserve Chair Jerome Powell recently acknowledged that inflation had started to rise partly due to tariffs, suggesting a delay in further economic progress. The central bank tracks PCE price measures to maintain its 2% inflation target. Despite inflationary pressures, the Fed left its benchmark interest rate unchanged in the 4.25%-4.50% range, with financial markets anticipating a rate cut in June.

(With Reuters inputs)