Amid impending tariff challenges and persistent inflation, American consumers are bracing for economic headwinds. Recent data from the Commerce Department reveals that U.S. households have increased savings, curtailed discretionary spending, and modestly boosted expenditures when adjusting for inflation, recovering slightly from a quieter January. Despite these efforts, there is little sign of significant easing in inflationary pressures.
One major factor overshadowing consumer behavior is President Donald Trump’s assertive trade policy, particularly new tariffs on auto imports and other looming levies. These actions could strain consumer spending — a vital component of the U.S. economy — and drive prices further upward, experts caution. “President Trump’s economic policies are causing concern among both consumers and businesses,” remarked Chris Rupkey, chief economist at FwdBonds, in a note on Friday. He warned of potential economic stagnation if policymakers are not cautious.
The Personal Consumption Expenditures (PCE) price index, a key measure of price changes, rose 2.5% in February year-over-year, consistent with January’s figure. On a monthly basis, prices increased by 0.3%, also unchanged from January. Although economists anticipated that declining energy prices and steady food prices would support a disinflationary trend, the core PCE index — which excludes food and energy — saw a slight increase, rising 0.4% for the month and 2.8% annually, up from 2.7% in January. “Inflation remains stubbornly high, posing a challenge for the Federal Reserve,” noted Dan North, senior economist at Allianz Trade North America.
Despite the inflationary concerns, consumer spending adjusted for inflation rebounded in February, rising 0.4% for the month. This followed a revised 0.3% decline in January. Notably, consumers directed more spending towards goods, potentially in anticipation of incoming tariffs, while cutting back on services like dining and travel. Kathy Bostjancic, chief economist at Nationwide, highlighted that “consumer confidence is being affected by economic uncertainties and stock market declines, leading to reduced spending on discretionary services.”
Nevertheless, there is a positive development for household finances as incomes rose by 0.8% in February, with disposable income up 0.9% before and 0.5% after inflation adjustments. This led to an increase in the personal saving rate, which climbed to 4.6% from a revised 4.3% in January. “Consumers are cautious, reflected in high savings and restrained spending, but growing incomes provide a cushion against inflation,” stated Robert Frick, corporate economist at Navy Federal Credit Union. “The full impact of tariffs, especially on autos, remains to be seen regarding price increases.”
Consumer Insights
The current economic environment, shaped by tariffs and sticky inflation, may lead consumers to exercise caution in their spending habits. As prices continue to rise, particularly in sectors affected by tariffs, individuals might prioritize essential purchases over discretionary ones. This shift in consumer behavior could impact service industries, such as dining and travel, which rely heavily on discretionary spending.
Moreover, the increased saving rates indicate a growing wariness among households, as they prepare for potential economic uncertainties. While rising incomes offer some relief, the sustained inflationary pressure and potential for further price hikes due to tariffs may compel consumers to remain vigilant with their finances. This cautious approach could influence overall economic growth, given the crucial role consumer spending plays in the U.S. economy.
