U.S. consumer spending jumps while key inflation gauge slows down
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U.S. consumer spending jumped in March while a key measure of inflation decelerated, a welcome reprieve before tariffs are expected to broadly drive up prices.
Inflation-adjusted consumer spending climbed 0.7% last month, according to Bureau of Economic Analysis data out Wednesday. That was the most since the start of 2023 and suggested households spent aggressively to get ahead of new tariffs.
Meantime, the Federal Reserve’s preferred inflation gauge – the personal consumption expenditures price index – stagnated from a month earlier for the first time in nearly a year. Excluding food and energy, the so-called core PCE was also unchanged, the tamest in almost five years.
The data round out a quarter in which the U.S. economy contracted for the first time since 2022 on a monumental pre-tariffs import surge and more moderate consumer spending. The report earlier Wednesday also showed core PCE inflation accelerated to a 3.5% pace in the first quarter – the most in a year.
The S&P 500 remained lower while the two-year Treasury yield dropped and the dollar strengthened.
The combination of slowing inflation and healthy spending suggest the economy was in a good place before the brunt of President Donald Trump’s tariffs took effect. Economists widely expect the trade policies to reinvigorate price pressures and in turn discourage spending.
“There’s a good chance that tariffs could create conditions to fuel inflation while simultaneously slowing economic growth,” Elizabeth Renter, senior economist at NerdWallet, said in a note. “This complicates the Fed dual mandate – where they’re left deciding what to prioritize: getting inflation down or minimizing the impact to the labor market.”
Fed officials have indicated they’re in no rush to cut interest rates as they wait for further clarity on how Trump’s policies will impact the economy. While the central bank is an independent institution, the president has been pressuring policymakers to reduce rates, which he says would help stimulate growth.
Another support for the economy last month was the strongest advance in real disposable income in more than a year. That helped bolster spending, particularly for motor vehicles and other durable goods, which climbed by the most since early 2023. Spending on services rebounded, especially for dining out.
Wednesday’s report offered some relief on the inflation front. A measure of goods inflation that excludes food and energy fell for the first time this year. Core services prices – a closely watched category that excludes housing and energy – were little changed, also the tamest since 2020.
While economists generally expect companies to pass some of the extra costs from tariffs on to consumers, some retailers have indicated they will be forced to absorb part of the hit as consumers show signs of fatigue after years of lingering inflation.
Companies like fast-fashion giant Shein Group Ltd. and Procter & Gamble Co. are already raising prices or planning to do so. Others in Corporate America like American Airlines Group Inc. and General Motors Co. have pulled guidance given heightened uncertainty.
The saving rate dropped to 3.9%, backing off after a big jump at the start of the year, according to the PCE report. Nominal wages and salaries advanced 0.5%.
Economists have paid close attention to developments within the labor market, as steady wage growth has supported resilient consumer spending in recent years. While the job market is showing signs of shifting into a lower gear, the government’s monthly employment report due Friday is forecast to show employers added a healthy number of jobs in April and the unemployment rate held steady.