In a macroeconomic environment characterized by stubborn inflation, U.S. consumer spending showed almost no growth in February. Furthermore, influenced by the conflict involving Iran, future inflation is expected to accelerate significantly. Data released Thursday by the Bureau of Economic Analysis showed that after stalling in January, inflation-adjusted consumer spending increased by just 0.1% month-over-month in February. The core Personal Consumption Expenditures (PCE) price index—the Federal Reserve's preferred inflation gauge, which excludes volatile food and energy items—rose 0.4% from January, aligning with market expectations and matching the previous month's figure. On an annual basis, the core PCE index increased by 3.0% year-over-year, consistent with forecasts and slightly below January's 3.1% reading. Additional details revealed that spending on goods rose for the first time in three months, primarily driven by a strong rebound in motor vehicle purchases. Spending on services increased modestly, led by transportation services. The headline PCE index rose 2.8% year-over-year in February, remaining notably above the Fed's 2% target. Overall, the Fed's preferred inflation measure remains elevated. Combined with expectations for a significant rebound in inflation and signs of weakening consumption, the risks of stagflation are increasing. The latest spending data is consistent with a consumer landscape that has become more cautious over the past six months, as persistent cost-of-living pressures and a weakening nonfarm labor market weigh on expenditure. On Wednesday, the U.S. and Iran agreed to a temporary two-week ceasefire in exchange for Tehran allowing safe passage for large vessels through the Strait of Hormuz, causing oil prices to fall. However, Brent crude futures remain approximately $25 per barrel higher than pre-conflict levels. Recent geopolitical developments, however, suggest the ceasefire agreement is fragile. Shortly after the truce was supposed to take effect, the Israeli Defense Forces launched large-scale airstrikes on multiple locations in Lebanon, resulting in over 250 casualties. This military action is widely seen as an attempt to pressure U.S.-Iran negotiations. In response, Iran's chief negotiator warned that Israel is escalating a parallel conflict, while the U.S. insists Iran abandon its nuclear ambitions, potentially jeopardizing talks aimed at a permanent peace agreement. Economists widely anticipate a notably hot Consumer Price Index (CPI) reading for March. A recent survey of economists projects a 0.9% month-over-month increase in headline CPI and a 0.3% rise in core CPI. If realized, this would represent one of the sharpest monthly surges since the peak inflation period in mid-2022, largely driven by war-related spikes in oil and gasoline prices. Concurrently, the New York Fed's March Survey of Consumer Expectations showed one-year inflation expectations rose to 3.4%, up from 3.0% in February, with expected gasoline price increases jumping to 9.4%. This indicates that energy price shocks are rapidly influencing household expectations. As the labor market and U.S. economic growth show significant signs of slowing, supply shocks are simultaneously pushing inflation higher. These increasingly evident stagflationary dynamics place the Federal Reserve in a difficult position. "When households are facing or anticipating economic hardship, they tend to pull back on spending as a form of self-protection," said Elizabeth Renter, a senior economist at personal finance platform NerdWallet. "This can have a real impact on the overall economy, leading to slower growth." A persistent shadow of inflation looms, with the new Middle East geopolitical tensions—fueled by U.S. and Israeli airstrikes—set to drive up fuel and raw material costs, thereby exacerbating inflationary pressures. On Thursday, Brent crude futures rose significantly as investors worried about the fragility of the ceasefire and heightened geopolitical risks to Middle Eastern supplies, doubting that restrictions in the Strait of Hormuz would be relaxed soon. The latest consumer spending data reveals that over the past six months, U.S. consumers have collectively become more cautious due to rising living costs and a sluggish job market. According to BEA statistics, real disposable income unexpectedly fell by 0.5% month-over-month in February, the largest decline in nearly a year. Real personal consumption expenditures increased by a mere 0.1%, highlighting the near-stagnation of consumer spending amid a high-inflation backdrop. Several major companies have begun passing these higher costs onto consumers or have recently announced plans to do so. While higher tax refunds helped support consumer spending in February, rising energy prices may erode this positive factor in the coming months. Delta Air Lines stated that, beyond recent increases in fares and baggage fees, the airline giant is "considering further" price hikes. The U.S. Postal Service plans to raise prices on some packages by up to 8% by mid-January next year. Separately, the BEA reported that U.S. economic expansion in the final months of 2025 was slower than economists had previously anticipated. The final reading for inflation-adjusted Gross Domestic Product (GDP)—a measure of the value of goods and services produced—grew at an annualized rate of just 0.5% in the fourth quarter, below the consensus forecast of 0.7%. Conflict Ignites Re-inflation: March CPI Could Show Sharpest Monthly Surge in Years Pre-existing U.S. inflation indicators had not fully retreated to safe levels before the conflict, and March is likely to see a pronounced "re-acceleration" of inflation due to the energy shock. February's pre-conflict data already revealed underlying fragility: real consumer spending grew just 0.1% month-over-month, while core PCE rose 0.4% monthly and 3.0% annually, indicating slowing consumer demand alongside persistent core price pressures. Entering March, as renewed Middle East conflict pushes oil and gasoline prices higher, the latest survey of economists indicates a widespread expectation for CPI to rise 0.9% month-over-month. If realized, this would be one of the strongest monthly increases since the high inflation period of mid-2022. In essence, the conflict with Iran has re-awakened the "inflation beast" that had never fully retreated. More importantly, the energy shock stemming from Middle East geopolitical conflict is simultaneously spreading to inflation expectations, consumer behavior, and the path of monetary policy. The New York Fed's March survey showed U.S. consumers' one-year inflation expectations rose to 3.4%, a significant jump from February's 3.0%, with expected gasoline price increases surging to 9.4%. Meanwhile, the Fed's March meeting minutes revealed that some officials are more open to considering additional rate hikes, and market expectations for interest rate cuts this year have cooled considerably. From the perspective of Wall Street macro strategists, the current danger lies not merely in high inflation, but in a combination of weakening growth, energy-driven re-inflation, and a Federal Reserve with diminished capacity to ease policy—a clear stagflationary mix. With consumption and growth momentum faltering, yet energy shocks pushing near-term inflation and expectations higher, the economy is exhibiting a classic stagflationary profile—precisely the scenario the Fed most wishes to avoid.
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