Inflation Stubbornly High, Spending Weak—A Recipe for Trouble?
For months, policymakers have reassured Americans that inflation is cooling, the economy is resilient, and a soft landing is within reach. But Friday’s report from the Commerce Department tells a different story—one of rising uncertainty, stubbornly high prices, and cautious consumers who aren’t buying into the optimism.
Inflation ticked up again in February, with consumer prices rising 2.5% from a year ago. Core inflation—excluding volatile food and energy prices—rose to 2.8%, making it clear that costs aren’t stabilizing as quickly as many had hoped. While spending technically increased, a closer look reveals a concerning trend: much of it was driven by rising prices, not real growth. The economy isn’t overheating—it’s struggling to stay warm.
Americans Are Spending—But Only Because They Have To
At first glance, a 0.4% rise in consumer spending seems like a positive sign. But inflation-adjusted spending barely budged, rising just 0.1%. This means that people aren’t actually buying more—they’re simply paying more for the same things.
And where is the money going? Not toward discretionary spending like travel, entertainment, or dining out. Instead, purchases of durable goods—cars, appliances, and other big-ticket items—jumped, likely due to fears over upcoming tariffs. Meanwhile, spending on services, which drives most of the U.S. economy, declined.
Joseph Brusuelas, chief economist at RSM, put it bluntly: “Consumers are making strategic purchases ahead of price hikes, at the expense of broader economic growth.” In other words, people aren’t confident about the future—they’re bracing for it.
Trump’s Tariffs: A Ticking Time Bomb for Inflation?
If Americans are worried about inflation now, the worst may be yet to come. Former President Donald Trump has reintroduced aggressive tariffs, slapping a 20% tax on all Chinese imports, a 25% duty on steel and aluminum, and announcing new tariffs on imported cars.
While Trump and his supporters argue that these measures protect American jobs, history suggests otherwise. Tariffs typically lead to higher prices for consumers, as businesses pass costs down the supply chain. The Federal Reserve has already warned that inflation could rise further as these policies take effect.
Fed Chair Jerome Powell insists that inflation from tariffs could be “temporary,” but there’s an undeniable problem: economic confidence is already slipping. A recent Pew Research Center survey found that 63% of Americans still see inflation as a “very big problem,” and confidence in the economy has dropped to a 12-year low. If tariffs push prices higher, expect consumer spending to slow even further.
A Dangerous Cycle: Rising Savings, Falling Confidence
There is one bright spot in the report: incomes rose 0.8% in February, marking the second straight month of strong gains. But rather than fueling more spending, much of this extra income is going into savings.
Higher savings rates are usually a good thing—except when they reflect consumer anxiety. Economists have noted that Americans are saving more not because they feel financially secure, but because they’re uncertain about what comes next. When people hold onto their money instead of spending it, businesses struggle, job growth slows, and economic momentum fades.
Retailers are already feeling the impact. Lululemon and Nike have issued warnings about slumping consumer demand, while giants like Target and Walmart are lowering their expectations. This isn’t just a spending slowdown—it’s a clear signal that consumer sentiment is shifting, and not in a good way.
Is the U.S. Economy on Shaky Ground?
The Federal Reserve faces an increasingly difficult balancing act. Inflation is still above the Fed’s 2% target, making interest rate cuts unlikely in the near future. At the same time, spending is weakening, businesses are bracing for slower growth, and confidence in the economy is fading.
If inflation remains sticky and tariffs push prices even higher, the risk of a recession grows. The question isn’t whether Americans are feeling economic pressure—it’s how much more they can take before cracks in the system turn into something bigger.
For now, all signs point to a turbulent road ahead.