EconoFACTS

March 28, 2025 | 09:51

U.S. Core PCE Inflation Came in “Hot” with Spending a Little Light

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Core PCE inflation, the Federal Reserve’s preferred measure of consumer inflation, came in “hot”, increasing 0.4% rounded and 0.37% unrounded in February and above the consensus forecast of 0.3%. It was also the third consecutive month of increasing core PCE inflation since a modest 0.10% increase in November. From a year ago, core PCE inflation also was higher than expected clocking in at 2.8%, up from an upwardly revised 2.7% in January. Durable goods and services drove much of the price gains in February with both categories rising 0.4% in the month. This was a very different message on inflation than we got from the core CPI measure just two weeks ago that showed some moderation to a 0.2% pace with the year-on-year rate holding steady at 3.1%. Overall PCE inflation was largely in-line with the consensus forecasts, rising 0.3% in February and 2.5% from a year ago. While no reason to panic yet, the unfavorable upward trend in core PCE inflation will keep the Fed on hold as they await the impact of import tariffs and other countries' retaliation on consumer prices.

Personal spending rebounded slightly less than expected, increasing 0.4% in February, with January's growth revised down to -0.3%. Real spending barely increased 0.1% following a 0.6% decline the prior month. Consumers shifted their spending aggressively away from services and toward durable goods, likely in anticipation of rising import tariffs and prices. Real personal services spending fell 0.1% in February even as real durable goods spending jumped 1.0%. Consumers are clearly becoming more tactical and cautious in their spending as they try to navigate this uncertain economic and inflationary environment. The personal savings rate improved to 4.6% from 4.3% in January and just 3.3% in December after two consecutive months of strong personal income growth.

Personal income unexpectedly increased a robust 0.8% in February, easily beating the consensus forecast looking for a 0.4% gain, and an improvement from an already strong but downwardly revised 0.7% increase in January. Wage and salary gains were buoyant, increasing 0.4%, a notable improvement from 0.2% in the prior month. But disposable personal income got a big assist from a large increase in current transfer payments, primarily reflecting premium tax credits for health insurance.

Bottom-line, this personal income and spending report had a decidedly stagflationary feel as consumers held back on services spending and braced for much higher prices on durable goods, especially autos. Core PCE inflation remains uncomfortably untamed going into what we expect could be another bout of supply chain disruptions and goods price inflation as sizable tariffs are put on a broad range of goods imports and commodities. On the bright side, strong income growth over the past two months has allowed consumers to build back their savings since the holidays, and that has the potential to unleash better consumer spending growth should the trade and growth concerns unexpectedly ease in the months ahead.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics